Issues with stamp duty land tax (SDLT) on property exchanges
20th September 2024
Posted in Articles by Andrew Marr
SDLT on property exchanges can be quite complicated, although the main principle is fairly easy to understand. For example, if two people swap properties worth £1m then each individual will be treated as having paid £1m for each property and SDLT will be payable by each person on this amount. However, the rules are slightly more complicated. Consider the following example from HMRC:
HMRC example
Arwen transfers Whiteacre (worth £3.25 million) to Bearcat and pays Bearcat £750,000 in exchange for Bearcat transferring Greenacre (worth £4million) to her, Arwen.
The SDLT legislation says that Arwen is liable to SDLT on the higher of:
1. The consideration she is giving for Greenacre, which is £750,000 cash and the £3.25 million value of Whiteacre (which comes to £4 million in total).
and
2. The market value of Greenacre, the property she is acquiring (£4 million).
This seems OK because both numbers are the same and it seems logical that SDLT should be payable on £4 million which is the value that Arwen is paying for Greenacre. However, let us consider how these rules operate for Bearcat:
The SDLT legislation says that Bearcat is liable to SDLT on the higher of:
1. The consideration he is giving for Whiteacre, which is the £4 million value of Greenacre.
and
2. The market value of Whiteacre, the property he is acquiring (£3.25 million).
This seems unjust because the rules seem to be dictating that Bearcat has to pay SDLT on a £4 million value when the property that he is acquiring is worth just £3.25 million. Fortunately, HMRC agree that this is unfair and are happy with a ‘workaround’ interpretation which says that only £3.25 million of Greenacre’s value constitutes consideration for the acquisition of Whiteacre and the remaining £750,000 of the value is consideration for the cash that he has received. This gets us back to the logical answer that SDLT should be paid on £3.25 million.
This approach can also be extended to cases between connected parties where there is a gratuitous element. For example, if a father gives his son a £1 million house in exchange for receiving a £0.5 million house from his son, under the above rules he is seemingly liable to pay SDLT on £1 million. However, the ‘workaround’ here involves him saying that only £0.5m of the £1 million house is consideration for his son’s house and the remaining £0.5 million is a gift. Unfortunately, the rules do negatively impact the son. He must pay SDLT on £1 million (the value of the property that he has acquired) even though he has only ‘paid’ £0.5 million for it. This seems an odd result, given that an outright gift of the property would not attract any SDLT.
Forbes Dawson view
There are clearly traps that can be fallen into with these rules. Although HMRC seem to take a lenient and purposive view of the legislation, their kindness will only stretch so far. It is clear that property exchanges should be avoided when there is some gratuitous intent between connected parties. In the above example it would have been sensible for the father to exchange a 50% interest in the £1 million house with the son in the first instance (meaning that the son would only have paid SDLT on £500,000). At a later date (and as part of a separate transaction) the father would be free to transfer his remaining interest as a gift. Where these rules make the purchaser’s position ambiguous then they should consider seeking non-statutory clearance from the HMRC Stamp taxes team. We have usually found them to be helpful and practical.
