It is tempting to sub-sell interests in a property to your spouse to avoid paying Stamp Duty Land Tax (SDLT). However, such a scheme could, in fact, backfire and result in a higher consideration being paid, as demonstrated in this case.
Background:
Mr. and Mrs. Murphy acquired a property for £277,000 from third-party sellers in April 2010. At the time of the sale, they were not married, and Mrs. Murphy was known by her maiden name of Dennis. On the same date as the original sale contract, they executed a Supplemental Deed purporting to transfer all but 1% of Mr. Murphy's interest to Mrs. Murphy for the consideration of her paying £119,110 of the purchase price.
The property was purchased with a joint mortgage. An SDLT return was filed reporting consideration of £119,110 and tax due of nil. In late 2013, HMRC informed all taxpayers who had used Arc Solicitors for their property purchases, that it was reviewing all those SDLT returns submitted by their offices.
The review revealed a discrepancy between the consideration paid, as per the land registry of £277,000, and the £119,000 recorded on the submitted return. HMRC raised an assessment for £8,310 SDLT based on the £277,000 Land Registry price. HMRC stated that it was satisfied that the officer had concluded that there had been a loss of tax and raised an assessment in line with that conclusion. Mr. and Mrs. Murphy appealed the assessment.
Decision:
The First-tier Tribunal (FTT) however dismissed their appeal. The Tribunal rejected the claimants’ argument that Section 45 of the Finance Act 2003 (FA 2003) applied, thereby reducing the chargeable consideration, as the sub-sale was only part of the property interest and the other, larger sum, was chargeable as a separate contract.
In relation to Section 45, the Tribunal also noted that a “sub-sale generally refers to a transaction whereby an initial sale has been agreed for a property to pass from A to B but, before the sale is completed, B agrees to sell the property to C. If no relief were available, there may be SDLT due on both the A to B sale as well as the B to C sale – despite B never having possession of the property for any substantive period. Sub-sale relief seeks to relieve the effective double taxation that might arise.” In this case, however, the original and final purchasers were the same persons. The Supplemental Deed intended to sub-sell all but 1% of Mr. Murphy’s 57% interest in the property to Mrs. Murphy who already owned a 43% interest in the property. Moreover, the fact that there was a joint mortgage to pay the original seller weighed heavily against the couple.
The FTT also found that the discovery assessment was valid, as both the subjective and objective elements of the relevant test were met.
If Section 45 did not apply, the chargeable consideration on the notional transaction had to be per Section 75A(I) of the FA 2003 which considers the largest amount. The chargeable consideration for the property acquisition was £336,555 – £277,000 under the original sale contract and £59,555 under the Supplemental Deed. “This figure is higher than the chargeable consideration if there was no sub-sale. However, that is simply the result of applying the statutory provisions to the facts … We leave it to the parties to agree on how the above is to be reflected in the amended assessments. We give leave to apply to the Tribunal if the parties are unable to agree.”
Implications:
Before entering into any type of scheme, it is important to verify that such a scheme will not backfire, as it did in this case. Instead of reducing the amount of consideration, the amount of chargeable consideration was in fact increased. Indeed, the subscale was not considered a sub-sale for the purpose of Section 45 of the Finance Act 2003, as the parties were virtually the same as those in the original contract.
Another important fact to highlight is that the scheme was put into place over a decade ago. This demonstrates that it was not because the couple had eluded any initial purview that HMRC could not review the transaction and so duly requested the difference in tax value.