Although still not a mainstream idea, ‘selling’ a house by organising a raffle is becoming increasingly common as homeowners look to dispose of property for a price not otherwise achievable. “The £845,000 mansion sold for just £2” was the most watched video on the BBC website this morning, but how true is this statement? Anyone that has ever bought or sold a house will be aware that there are numerous costs associated with the process, so can you purchase a house for £2?
A ‘raffle’ of this type is on the face of it a competition, however it may fall foul of The Gambling Act 2005. Specifically if the competition is deemed to be a lottery under this Act, the promoter of the competition, in this case the seller of the property, could commit an offence. The competition may be considered a lottery if it is deemed a game of chance, rather than a game of skill. Whilst there was a question to be answered in order to enter, if the question is so easy so as not to prevent a significant proportion of the prospective participants from successfully doing so, it is unlikely to be considered a game of chance.
If the hurdle above is overcome, there is then the question of how to structure the promotion. In essence, what is the successful entrant actually winning, and what is deemed to be the actual purchase price of the property.
If the winning entrant is genuinely paying £2 for the property, and it is to be their only residential dwelling, the Stamp Duty Land Tax (SDLT) position may be that nothing is to be paid as it falls within the 0% band. SDLT is generally payable on the total amount given (either directly or indirectly) for the purchase or transfer of property in the England, Wales and Northern Ireland by the purchaser or someone connected with him. As the other entrants would not be connected to the winning entrant, the only amount paid would be the £2 entry fee.
Would the seller actually want to sell their house for £2? If 500,000 tickets were sold, the seller is actually receiving £1M- the surplus may therefore be considered as profit and taxed accordingly, which would have a significant impact on the net amount received for the house, and could affect whether the vendor could discharge any mortgage on the property. There are two potential scenarios that could mitigate this cost, however both carry costs of their own. Firstly the seller could transfer the property at market value to a business that would run the competition. This would be an appropriation to trading stock of the business, but any gain between the original acquisition and transfer should covered by the main residence exemption, so no Capital Gains Tax (CGT) would be payable. This transfer would be subject to SDLT, however. At its simplest, and assuming that the market value of the house was £1M, the business then has a nil profit: sales £800,000 less cost £800,000. Transferring the property to a business in this manner may not be possible if the property is subject to a mortgage.
The alternative is that the prize is not the house, but rather the sum total of the cash received for tickets, which is then used to purchase the property. Clearly there would need to be some legal documentation in place to ensure the winning entrant didn’t just take the money and refuse to purchase the property. SDLT would be payable by the winning entrant on the purchase (and could be paid using the prize money), but the seller would have to ensure they were not undertaking a trade, so as to attract a liability for tax. The seller would also have to take care to ensure the property remained their main residence to prevent the sale attracting CGT.
Notwithstanding all of the above, winning a house could be a liability rather than an asset. With a (presumably) binding contract to transfer the house to the winner as soon as the winner is chosen, the winning entrant may not have the comfort of being able to undertake proper searches or due diligence on the property. This leaves the winning entrant open to the possibility of a fraudulent seller or the property having been given as security via a mortgage for a debt that would need to be repaid or being liable for significant fees when they take over ownership of a property with significant problems. The seller may also have issues if they fail to sell enough tickets- would they have to return all of the entrance fees, or sell the property at below market value.
If all of the above could be resolved by the seller, winning a house for £2 may well not be too good to be true, but the pitfalls are very real and anyone thinking of running such a competition (or taking part) should ensure they seek good advice.