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Guest Blog: A Black Letter Day

By Simon Howley, managing partner of Bell Howley Perrotton

A client came to see me recently explaining that he and his wife were in the process of buying an old Victorian terraced house in West London, as a replacement of their main residence and informing me that the 3 per cent Stamp Duty Land Tax (SDLT) surcharge should not be applicable.

As we were chatted, he was bubbling over with excitement and explained that the property in question was currently split into three self-contained apartments, and that they intended to combine these into one fantastic residential property.

Sorry to burst your bubble” I said, upon which I then started to explain to him that when a purchaser acquires multiple dwellings and takes the view that the new main residence will be the single dwelling that will result from those dwellings being merged, that HMRC have already successfully argued that there would actually be no replacement of a main residence in such a case.

When does the 3 per cent surcharge apply?

The surcharge can only apply to the acquisition of a ‘dwelling’.  Bizarrely the surcharge legislation has its own definition of dwelling, which is based on the general definition of residential property for SDLT.

The main exception to the surcharge rule, is the purchase of a replacement property that is to be his only or main residence. This is so however many other dwellings he owns.

Example I: Derek sells the house which was his old main residence and, within the time limit, buys a house to be his new main residence for £1,750,000. He has a portfolio of residential rental properties. He is entitled to the replacement relief and his SDLT is £123,750.

What counts as a main residence?

The SDLT legislation does not define what “only or main residence” means, so it is a matter of looking at the ordinary meaning of the words.

However, matters can become more complex where any purchase is a joint one, as we will see by expanding on our example of Derek above.

Example II: Derek now sells his house, which was his main residence, and still retains his residential property portfolio.  He and his girlfriend Lisa, within the set time limit, jointly buy a house to be their main residence for £1,750,000.  Lisa had been living with her parents, but owns a flat that she rents out.  They must pay the 3 per cent surcharge, as although Derek qualifies for the exception, Lisa does not, because of the flat, and she is not replacing a main residence of hers.

However, they could have avoided the surcharge if Lisa had sold her flat before the completion on the new house, or if Derek would have sold or gifted a share in his old house to Lisa – it need only be a fractional share – before he sold it and it had become her main residence.

Where the purchaser is married, that spouse is also treated as a purchaser for the purposes of the 3 per cent SDLT surcharge.  If either spouse triggers the surcharge it would apply to the whole transaction.

Anyway, back to my now thoroughly depressed client, as I explain to him the recent tax case and the impact this could have on his proposed purchase.

The HMRC Case

The case in question is called Moaref and another v HMRC [2020] UKFTT 0396 (TC), in which the First-tier Tribunal held that, for the purposes of the 3 per cent SDLT surcharge, the buyers did not replace their only or main residence when they bought two new apartments, with the intention of converting them into one new main residence, and then sold their old main residence.

The taxpayers owned a dwelling in Dubai (the ‘old main residence’), which they lived in as their only or main residence up to August 2016.  In 2017 they acquired two apartments in separate land transactions, from separate vendors in Central London, paying the surcharge on each.  The first apartment costing £5,175,000, paying £690,000 in SDLT with apartment two costing £7,400,000, with £1,023,750 being paid in SDLT.  The case only related to the second apartment.

Following the sale of the old main residence, the buyers sought to reclaim the surcharge. HMRC repaid the surcharge on the first land transaction, but not the second.

The taxpayers had been living in both apartments since the purchase, using an outside balcony to connect them.  The children sleeping in one apartment with the parents sleeping in the other. They generally use the kitchen facilities of only one apartment, and the reception area of the larger apartment for day-to-day living.

Whilst it was accepted that the taxpayers had a clear intention to combine the two apartments, it was this very intention that was relevant to HMRC’s argument.

In Mr Moaref’s Witness Statement he stated that:

  • individually the properties were not suitable for my wife and two children”;
  • the properties were always intended as be one residence”; and
  • it was my clear intention from the first time I saw the properties to amalgamate them into one”.

The above statements supported HMRC’s main argument that neither of the apartments was intended to be the taxpayers ‘only or main residence’.  If the draftsman had used wording such as “intend to occupy as” we may have ended up with a different result, but the words ‘to be’ have a narrow meaning.

As the tribunal highlighted, the wording is prescriptive and detailed, with the result that a black letter approach to interpretation applies rather than a principles-based drafting approach.

With this in mind, taxpayers should carefully consider the order in which dwellings are sold and purchased, as this may affect whether or not the surcharge is applicable.