People who have purchased a property should be warned of the risks associated with using companies that claim to offer help with stand duty land tax (SDLT).
Sometimes, companies contact buyers claiming that they can obtain a refund for part of the SDLT already paid to HM Revenue and Customs (HMRC) after the purchase of the property.
However, SDLT is a complex tax and you should be aware of the risks and complications that could occur if you make a refund claim. Claims companies usually tell the buyer that they have paid too much tax and are entitled to money back. They usually make two claims:
- That the buyer is entitled to multiple dwellings relief, or
- They only need to pay the lower commercial rates because of some aspect of the property
But although buyers are entitled to review if they have paid the correct tax, the best time to do it is before exchange of contracts, rather than post-completion. Sometimes, these claims can take place on specious circumstances, or on the basis of a rationale already being contested by HMRC through the courts.
The issue is that HMRC processes these types of claims very quickly but sometimes, it does not make a considered assessment for the application until later. They work on a ‘process now, check later’ basis. This means that although the client has received a quick payout for the claim, they could be asked to repay the reclaimed tax later on, after the application has been reviewed, with interest on top.
Sometimes, this can occur after the claim company who encouraged them to query their SDLT payment no longer exists or has disappeared. The buyer could also be asked to pay a penalty of up to 100% of the tax refund, leaving them in a worse position.
Additionally, the agent who encouraged them to make the claim will sometimes take their fee as soon as the buyer receives the initial pay out, so they will lose money here too.
HMRC case studies
- ‘Mixed-use transaction’ example
Susan purchased a seven-bedroom detached house in July 2023. The detached house has several acres of landscaped land.
Susan’s solicitor advised her that she purchased a residential property and should pay the residential SDLT rate. The house cost £1,750,000 and she paid £123,750 in SDLT.
But after the purchase, Susan received a letter from Stamp-Experts who told her she may have paid too much SDLT and might be able to get her money back.
Stamp-Experts told Susan that because a public footpath runs over part of her land, she doesn’t need to pay residential rates because that part is non-residential – they call it a ‘mixed transaction’.
They tell Susan she should’ve paid £77,000 in SDLT and could get a refund of £46,750. They claim to have helped other similar cases and secured a hefty refund from HMRC
Susan agrees to let Stamp-Experts act as her agent. They write to HMRC to amend her tax payment and request a repayment, stating the property was a mix of residential and non-residential land.
HMRC refunds the £46,750 almost immediately as Stamp-Experts have made a valid amendment. However, HMRC has not conducted any detailed checks into the reason for the refund.
HMRC operates a ‘process now, check later’ system, so they open a check into Susan’s return at a later date.
HMRC then concludes the purchased property is residential and the refund was not due. Stamp-Experts had incorrectly advised Susan about the public footpath.
HMRC guidelines state:
- HMRC suggests rights of way (such as public footpaths) will not make a transaction ‘mixed’, nor
- in the other similar cases, HMRC opened checks and requested the refunded money back
As a result. Susan has to pay back £46,750 with additional interest and, because Stamp-Experts took their fee as soon as the money was refunded, she is worse off.
HMRC will also consider whether Susan receives a penalty, which can be up to 100% of the refund given. And having an agent act on her behalf does not stop the possibility of being charged a penalty because SDLT is a self-assessed tax.
‘Multiple dwellings relief’ example
Chris purchased a four-bedroom property in central London in March 2022. His solicitor advised him to pay the residential SDLT rate of £195,750.
But after moving in, Chris’s neighbour told him about a SDLT claims expert who helped him get refund on their SDLT the previous year.
The neighbour explained that because their house had an ‘internal annex’ with a bedroom and ensuite bathroom, the agent claimed multiple dwellings relief (MDR) and won a refund of over £60,000.
Chris’s house has a similar layout, with a basement that has a bedroom with a bathroom and small utility area. There is a separate entrance from the garden and a staircase links the basement to the ground floor.
The remaining three floors feature three bedrooms, two reception rooms, a kitchen/family room and several bathrooms. Chris contacts the SDLT claims expert, who tells him the basement ‘annex’ is a separate dwelling and he’s entitled to MDR.
The ‘expert’ tells Chris they’ve dealt with hundreds of similar cases and can obtain a refund of £73,350, minus their 20% fee. Chris decides to authorise the claims specialist as his agent, as the money will help with home renovations.
The SDLT agent writes to HMRC in May 2022 to amend the original return, making a claim for MDR. Three weeks later, Chris receives the repayment.
But in November 2022, HMRC contacts Chris to say they’re checking the amendment. When Chris calls HMRC, the caseworker explains HMRC operates on a ‘process now, check later’ basis and can open compliance checks after a repayment.
In early 2023, HMRC writes to explain to John that:
- the basement annex didn’t provide all the facilities needed for basic domestic living needs, and
- an objective observer would see the property as one, not two genuinely independent dwellings
HMRC highlighted several tribunal decisions where the courts agreed. The letter explains that because John acquired one dwelling, MDR is not due and the original SDLT rate was correct. He receives a tax bill for £73,250 with additional interest.
HMRC is also considering charging a penalty, which could be up to 100% of the tax due if Chris is found to have acted carelessly or deliberately. HMRC states that even though Chris used an agent, it was his responsibility to make sure he paid the right tax.
As a result, Chris is now out of pocket. The agent took their 20% free when he first received the payment, and Chris is liable for repaying the tax, interest and penalties – not his agent.
Ways to protect clients
One way you can stop your clients from getting into this situation is by informing them that they might be approached by these types of companies after the sale, and let them know the things they should consider.
If buyers are made aware of the risks before they are approached, they may be able to resist these the temptation of these large payouts, and it might discourage them from falling victim to these companies.
You could inform your clients of the risks of unfounded SDLT refunds and the importance of exercising their own judgement.
Further reading
Purchases – Oakwood Property Solicitors
WHAT TO DO NEXT
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