A Quick Replacement – SDLT Relief and Recent Case Law

Stamp Duty Land Tax (SDLT) is payable on the acquisition of land and property over a certain price in England and Northern Ireland. Different taxes apply if the land/property is located in Scotland (Land and Buildings Transaction Tax) or Wales (Land Transaction Tax). The tax payable is calculated using tax bands. Where the price/consideration for a property is higher, portions of the consideration may be subject to SDLT at progressively higher rates of SDLT. As a result of Covid-19, the government has confirmed that the residential rates of SDLT for property transactions between 8 July 2020 and 31 March 2021 are as follows:

Property or lease premium or transfer value	SDLT rate
Up to £500,000	Zero
The next £425,000 (the portion from £500,001 to £925,000)	5%
The next £575,000 (the portion from £925,001 to £1.5 million)	10%
The remaining amount (the portion above £1.5 million)	12%

In light of these reduced rates, where property is acquired before 31 March 2021 less SDLT will be payable, therefore those looking to move house and save on costs may want to ensure that they complete before this date. SDLT Surcharge  The standard residential rates of SDLT (see above) apply where individuals are acquiring a residential property, and do not own any other properties, or otherwise sell their main residence and buy a new residence within 3 years (see below). The 3% surcharge will apply where you already own a property and acquire additional properties, for example buy-to-lets and holiday homes. Where the surcharge applies, the SDLT rate will be 3% higher for each banding of SDLT as appropriate e.g. 5% band will be 8% etc. Replacement Relief  The 3% surcharge was enacted to discourage individuals and companies from acquiring multiple residential properties. However, where individuals acquire a property to live in as their main residence, before selling their previous main residence residence, the additional rates will apply on the new property acquisition (as on the end of the day of the transaction, the buyer will own two or more dwellings). The rules were not intended to increase the costs to individuals where the new property is to be used as their main residence (replacing the old main residence/home). There is provision in the rules to allow for such situations where the previous main residence is sold after acquiring the new main residence.  Replacement relief applies in the  following circumstances:

1. On completion, the individuals acquiring the the property intend to live in it as their main home.
2. Within 3 years of acquiring the 'new' property/dwelling, the individual (or their spouse/civil partner) sells the 'old' property/dwelling.
3. At any time in the 3 years prior to the purchase of the new property/dwelling, the individual(s) lived in the old property/dwelling as their only or main residence.

Where these conditions are met, the individuals may claim back the surcharge SDLT. In effect they will be treated as though the acquisition of the new property was at the standard rates of SDLT. Mehdi Moaref and Armaghan Mozhdeh v HMRC (2020) In the recent case of Mehdi Moaref and Armaghan Mozhdeh v HMRC, the First Tier Tribunal considered how SDLT replacement relief may apply on the acquisition of two properties that were amalgamated into one, to be used as a main residence. The Case The taxpayers acquired two adjoining flats, the first in May 2017 and the second in June 2017, paying the higher surcharge rates of SDLT on both acquisitions. They subsequently converted the flats into a single dwelling for them to live in. They sold their old main residence in July 2018, and sought to reclaim the additional SDLT paid on the acquisition of both flats. HMRC granted the repayment in relation to the acquisition of the first flat, but not the second one. They later sought to reverse their decision in respect of the first flat, but it was too late to change. The taxpayers argument was that there was nothing in the legislation restricting the replacement of a main residence to a single purchase, and that, had the 2 flats been converted into a single dwelling when the taxpayers acquired them, replacement relief would not be restricted. HMRC argued that neither flat was intended to be a replacement main residence. The replacement residence was an entirely new dwelling, resulting from the consolidation of the two flats into one. The Decision  The Tribunal held that the purchased dwelling had to the be the same as the dwelling that the purchasers intended to live in as their main residence, and dismissed the taxpayers appeal. It is clear that the taxpayers' situation was not contemplated when the relevant rules were drafted, but it is not the role of the Tribunal to 'fill a gap in the legislation'. Conclusion  The above case highlights the situations that could arise where the it is not clear how the legislation should apply. Nevertheless, taxpayers who are looking to take advantage of the current favourable SDLT rates should consider the availability of replacement relief, where they are unable to sell their old main residence before acquiring a new one. If you are uncertain or your SDLT position, or would like advice on the tax on acquisition/sale of property, please contact a member of our team. Related Articles https://www.stratostax.co.uk/insights/sdlt-relief-for-subsidiary-dwellings/ https://www.stratostax.co.uk/insights/possible-reclaim-of-3-sdlt-surcharge-beyond-3-year-time-limit/