1. Patrick Cannon clerks@15oldsquare.co.uk
SDLT
Patrick Cannon

2. Agenda The confusing rate structure and crippling rates of tax
Mixed use and capping a residential purchase at the 5% rate
Project Blue: What did the Supreme Court decide?

3. Basic residential SDLT rates
Five rate structures
1. “Normal” Table A Residential: 0% - 12%
2. “Higher rates” Table A: 3% - 15%
Band
Basic residential SDLT rates
Higher SDLT rates
£0–£125k 0% 3%
£125k–£250k 2% 5%
£250k–£925k 8%
£925k–£1.5m
10%
13%
£1.5m+
12%
15%

4. Five rate structures 3. 4.
5. Higher rate of 15% for company and other non-natural purchasers of dwellings above £500,000
First-time buyer Table A rates: nil up to £300,000 then 5% on next £200,000
Relevant consideration
Percentage
So much as does not exceed £300,000 0%
Any remainder (so far as not exceeding £500,000) 5%
Table B Non-residential and mixed 0% - 5%
Relevant consideration
Percentage
So much as does not exceed £150,000 0%
So much as exceeds £150,000 but does not exceed £250,000 2%
The remainder (if any) 5%

5. HMRC’s SDLT Calculator
Beware! It does not:
Calculate the 15% higher rate for company dwellings
Allow for linked transactions where aggregate consideration used
Apply the Table B rates where there are 6 or more dwellings
Calculate Multiple Dwellings Relief where the average price is used
Calculate “overlap relief” on new leases

6. Impact of the additional 3% rate:
£175,000 dwelling attracts tax of £6,250 instead of £1,000
£2m purchase attracts £213,250 instead of £153,750
£5m purchase attracts £663,750 instead of £513,750
SDLT amount could fund rent for 5 years
If mixed residential and non-residential use applies then a £5m purchase attracts £239,500 (saving £424,250)

7. Mixed Use
Given the eye-watering difference in tax that now exists between residential and non-residential rates there are now many more claims for Table B on residential purchases
Claims farmers making retro claims also annoying HMRC
HMRC’s unannounced change of practice – previously followed the CGT analysis which was based on land not required for reasonable enjoyment of the dwelling not being residential
HMRC now argue that for SDLT the garden or grounds comprises all land included with a residential purchase and is residential unless there is positive business use before and after the purchase
What is the correct legal position?

8. Mixed Use “Meaning of residential property” – s116(1) FA 2003
(1) In this Part “residential property” means—
(a) a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use, and
(b) land that is or forms part of the garden or grounds of a building within paragraph (a) (including any building or structure on such land), or…..
Immediately one sees that the definition is open to some of the grounds not being residential
When is part of the grounds not residential?

9. Mixed Use Let’s use HMRC’s own published guidance:
SDLTM20070 (now archived): “Garden or grounds” includes land which is needed [my emphasis] for the reasonable enjoyment of the dwelling, having regard to the size and nature of the dwelling. HMRC will apply a similar test to that applied for the capital gains tax relief for main residences (section 222(3) Taxation of Chargeable Gaines Act 1992).”
SDLTM30030: ‘Garden or grounds’ includes land which is needed for the reasonable enjoyment of the dwelling, having regard to the size and nature of the dwelling. [My emphasis]. This will usually be a question of fact depending on the individual circumstances of each case
HMRC currently use this approach to restrict the “granny annexe” exemption from the 3% additional rate

10. Mixed Use
Correct test is therefore whether the surplus land is required for the enjoyment of the dwelling rather than just a “nice to have”
Longson v Baker [2001] STC 6 and Re Newhill Compulsory Purchase Order [1938] 2 All ER 163 at 167 clearly establish that if the larger area of land is not needed for the reasonable enjoyment of the dwelling then it will not be residential property.
Would the loss of the land be a substantial deprivation?
Disclosure letter to HMRC?

11. Mixed Use: SDLT v CGT
Tension between CGT main residence exemption (wider interpretation) and SDLT (restrictive interpretation)
Adopting restrictive interpretation at purchase to minimise SDLT reduces area benefiting from PPR exemption on later disposal? Not if HMRC are now insisting on asymmetrical treatment
Conflict between seller’s and buyer’s treatment?
Widespread misconception that country houses with acres carry hefty SDLT bills when top rate is often 5%

12. Project Blue Ltd v HMRC [2018] UKSC 30
Sale of Chelsea Barracks for £959m by the Ministry of Defence to property developers in 2008
SDLT savings scheme combined exemption for a sub-sale with the exemptions for sharia funding intending that no SDLT payable
Taxpayer “won” in CoA by arguing that because its tax scheme failed tax was payable and so s75A could not apply
Taxpayer also argued successfully that HMRC had assessed the “wrong” taxpayer and so were now out of time so no SDLT was payable despite failed scheme

13. Project Blue Limited The scheme Ministry of Defence Project Blue Ltd
31st January, 2008
£959m
Freehold Sale
Freehold Sub-Sale
£1.25bn
+ options to re-acquire freehold
999 year lease
Ministry of Defence
Project Blue Ltd
MAR (bank)
The scheme

14. Court of Appeal decision
Project Blue Limited
Court of Appeal decision
S71A Exemption failed so SDLT arose on £1.25bn and section 75A therefore not relevant (but HMRC out of time to assess MAR)
Ministry of Defence
Project Blue Ltd
(Disregarded)
MAR (bank)
Freehold Sale
£1.25bn

15. “V” “P” Project Blue Limited Supreme Court decision
Freehold Sale
Freehold Sub-Sale
£1.25bn
+ option to re-acquire freehold
999 year lease
Ministry of Defence
Project Blue Ltd
MAR (bank)
“V”
“P”
Supreme Court decision
S45 disregarded the MoD to PBL sale
s71A exempted the PBL to MAR sale because in the real world PBL was MAR’s vendor
In principle the scheme worked subject to s75A
s75A applied regardless of whether a tax avoidance motive and only requirement is a reduced SDLT liability from a series of transactions, so applying s75A:
PBL was the tax avoider and so was “P” with the MoD as “V”
The chargeable consideration was £1.25bn being largest amount paid under the scheme
PBL could however claim a reduction under s80 if the £1.25bn payable was reduced below the £959m as a result of instalment payments being cancelled and it paid tax on £959m

16. Project Blue Ltd v HMRC [2018] UKSC 30: Talking Points
Lord Briggs’ dissenting decision: CoA was correct and MAR liable to pay on the £1.25bn, accepting that HMRC now out of time in this case – these schemes flourished in the 2 years before s75A was enacted and ought not to be allowed to work – Parliament cannot have intended a tax holiday prior to s75A
Both the majority and the minority were determined that one lot of SDLT was paid on these schemes and constructed their decisions with that in mind
But minority was prepared to allow this case to escape tax in the interests of a legally correct analysis and which would catch other schemes prior to s75A
Majority was not going to let even this case escape tax and constructed their decision accordingly even if it meant turning the CoA decision on its head
Lord Briggs: “section 75A floated into view, as a plank in a shipwreck.” – was Lord Hodge grasping at straws?