The pain continues for those trying to reduce or avoid stamp duty land tax (SDLT) on buying residential property. The latest case in a long line of memorable failures is Landmaster Investment Ltd and another [2023] UKFTT 736 (TC).
The buyer wanted to buy a flat from a developer in a new build development. The buyer completed the vendor’s “reservation form” to secure the apartment and paid a reservation fee of 0.2% of the purchase price. It subsequently purchased a 999-year lease over the flat it had reserved.
After buying the flat, the taxpayer submitted an SDLT return showing the apartment as residential property in the normal way. Later, under the guidance of an SDLT advisory firm, it submitted an amended return saying the purchase was a “mixed purchase” of residential and non-residential property. Where there is a mixed purchase, the non-residential SDLT rates can be used which for high-end property such as this can lead to significant SDLT savings.
The taxpayer’s, or probably more realistically, the adviser’s argument ran as follows.
An option agreement, such as the reservation agreement between the developer and the buyer, is a separate land transaction from the purchase of the property that is acquired under the option – so says Section 46 of the Finance Act 2003 (FA 2003).
So you have to decide whether the option transaction (as opposed to the property purchase) is a residential or non-residential transaction.
Residential property is defined in s116 FA 2003 as meaning a building that is used or suitable for use as a dwelling or in the process of being constructed or adapted as such. It also includes the garden or grounds and any other land that subsists for the benefit of the building.
Non-residential property is defined as any property which is not residential property. Where a person buys a mix of residential and non-residential property, the non-residential rates can be used.
The option, argued the advisers, is clearly not residential property – you can’t live in an option! So it must be non-residential property.
The purchase of the apartment is of course a residential transaction. However, where two transactions are linked they are broadly looked at as one. Transactions are linked if they are between the same vendor and purchaser (or persons connected with them) and form part of the same arrangement. The reservation agreement and the purchase of the flat were clearly linked. The linked transaction comprised the option agreement – a non-residential transaction (the taxpayer of course not planning to live in the option agreement!) and the flat (clearly residential), so it was a mixed purchase and the mixed rates could be used. QED!
In this case, the taxpayer entered into the reservation agreement as a genuine commercial arrangement and there was no suggestion it had done for tax planning reasons. However, we have heard that this approach is being pushed by some SDLT firms as a planning idea so that people who may not otherwise have entered into an option do so simply to avoid SDLT.
In Landmaster, the First-tier Tribunal (FTT) decided that the reservation agreement wasn’t actually an option at all. An option gives a person the right to buy (or sell) the subject matter of the option. What the reservation agreement did was to stop the vendor negotiating with anyone else to buy the property during a defined period. It was an exclusivity agreement rather than an option agreement. As such it wasn’t a land transaction at all. The only land transaction was then the purchase of the lease over the flat which was clearly residential – or so most of us would think but not this taxpayer (as we explain further below).
The FTT went on to consider what the result would be if the reservation agreement had been an option. It said the question was not whether the option is residential property but rather whether the option is an interest in land which is residential property. It said that if the taxpayer’s logic were correct, a 999-year lease couldn’t be residential property as you can’t live in a lease, you live in the property which is the subject to the lease. Applying the same logic to the option it was clearly an interest in residential land.
The taxpayer also advanced the argument that the block of flats included common areas which the leaseholder had the right to pass over under his lease. The communal areas couldn’t be used as a dwelling and so the lease was over mixed property.
The FTT said that the rights to pass though the common areas were not the main subject matter of the transaction, and only the main subject matter is taken into account in deciding if it is residential or not. The main subject matter was the flat which was clearly residential.
The court added that the common areas were also residential because they were part of a building suitable for use as a dwelling. It added that if the taxpayer’s argument were correct, virtually no flat would be subject to SDLT at residential rates as most blocks of flats include communal areas!
To be fair to SDLT claims firms, many opportunities to validly reduce SDLT are missed by buyers of property. The claims firms provide a valuable service in helping taxpayers identify these claims. The problem is when they push the boundaries too far beyond limits that no tribunal is going to accept. If you are approached, don’t dismiss out of hand but tread with great care if you want to avoid costly litigation which you’ll probably lose. You could have to sell your home to pay costs and end up living in an option agreement!
As experts in SDLT and other property taxes, we can assist in deciding whether a claim is valid or a bridge too far. For more information, please get in touch with your usual BKL contact or use our enquiry form.
Another of our recent articles about cases involving SDLT: HMRC go to the garage! Kozlowski, Espalier and SDLT
