This case study shows the complexity of the rules around the higher rates of SDLT for purchases of additional residential properties, especially the replacement of the buyer’s only or main residence. It also gives an example of the process involved when HMRC make a check of a return in an enquiry and the steps for challenging the compliance officer’s decision.

The Facts

In 2006 Katherine bought a flat in Paris (the Paris Flat). Katherine lived in the Paris Flat from 2006 until July 2010.

In July 2010, Katherine returned to London and lived in a rental property, letting out the Paris Flat.

In September 2013, Katherine bought a flat in London (the London Flat). From this time until May 2018 Katherine lived in the London Flat.

In October 2017, Katherine sold the Paris Flat.

In May 2018, Katherine acquired a house in London (the London House) to live in; she moved in and still lives there. She was the sole buyer and is single. She retained the London Flat to rent out.

The rules generally

The conditions for the higher rates of stamp duty land tax (SDLT) to apply to individuals buying a single dwelling (all of which have to be met for the extra 3% to be due) can be summarised as follows:

  • Condition A: The chargeable consideration for the property being bought is £40,000 or more.
  • Condition B: The property being bought (whether freehold or leasehold) is not subject to a long lease.
  • Condition C: There are other property interests counting against the buyer.
  • Condition D: The replacement exception does not apply.

It is clear that Katherine’s purchase of the London House met all of conditions A to C. The question is whether it met Condition D: it would not if the London House was a “replacement” of her only or main residence, as defined in the legislation at the time (for a purchase completing before 26 November 2018).

The replacement exception

In order for Condition D to be failed and for the “replacement exception” to apply for a purchase completing before 26 November 2018, the following five conditions all had to be met:

(a) On the purchase of the new home the buyer intends to live in the new home as the buyer’s only or main residence.

(b) In a transaction on the same date as, or at any time before, the purchase of the new home the buyer (or the buyer’s spouse or civil partner at the time) disposed of a major interest in another dwelling (“the sold dwelling”). [Note: for purchases completing after 26 November 2018 the “at any time” is replaced by a three year period.]

(ba) Immediately after that disposal, neither the buyer nor their spouse / civil partner retained a major interest in the sold dwelling. [Note: this condition was added for purchases completing from 22 November 2017.]

(c) At any time before completion of the purchase of the new home the buyer had lived in the sold dwelling as the buyer’s only or main residence. [Note: for purchases completing after 26 November 2018 the “at any time” is replaced by a three year period.]

(d) At no time on or after the disposal of the sold dwelling has the buyer (or the buyer’s spouse or civil partner) acquired a major interest in any dwelling with the intention of the buyer living in it as the buyer’s only or main residence.

Applying the rules

Katherine took specialist SDLT advice before buying the London House. She would meet all of the conditions for the replacement exception so long as she completed her purchase by 26 November 2018:

(a) She expected to buy a home to live in as her only residence.

(b) In October 2017 she had sold the Paris Flat.

(ba) She had not retained any interest in the Paris Flat.

(c) She had lived in the Paris Flat as her only residence from 2006 to 2010.

(d) At no time on or after the disposal of the Paris Flat in October 2017 had she bought another property intending to live in it (she had bought the London Flat in 2013).

It was clear that if she completed her purchase after 26 November 2018 she would have to pay the extra 3% SDLT because of one of the three year rules which came into effect for purchases from that date. She had last lived in the Paris flat in 2010, more than three years before the purchase of the London House.

Standard rates of SDLT paid

In the event, Katherine completed her purchase in May 2018 and so paid standard rate SDLT on the purchase of the London House, even though she retained the London Flat, relying on the sale of the Paris Flat to bring her within the replacement exception.

The land transaction return required to be submitted for the purchase of the London House does not require any of this background information. Panel 1 has to be completed as “01” (for standard rated residential property) rather than as “04” (for additional residential property subject to the higher rates).

HMRC check of return

HMRC’s Wealthy Mid-Sized Business Compliance made a check of the return, the questions from their opening letter of 26 February 2019 being wide ranging asking:

  • About any joint buyers and her marital status.
  • For the contract, the transfer and completion statement.
  • About the price.
  • Evidence that the London House is her main residence, such as a council tax statement and a bill or bank statement to her at that address.
  • Whether on completion of the purchase of the London House she had an interest in an additional dwelling anywhere in the world, if so they wanted the address and value of the dwelling and to know whether it is rented out or what it is used for.
  • About any dwelling held by any spouse.
  • If she had replaced her main residence they wanted to know the address of the property disposed of, the date of the disposal, evidence that she had lived in that property as her previous main residence and evidence of the disposal.
  • For a full explanation of why the higher rates for purchases of additional residential property has not been paid.

Information provided

Katherine provided the information on 21 March 2019, including a written opinion by an SDLT specialist detailing how the replacement exception applied and explaining why the three year rules did not apply; the purchase having completed by 26 November 2018.

The compliance officer made a follow up request by letter dated 9 April 2019 focussing on Katherine’s occupation of the London Flat from September 2013 to May 2018. He asked for copy council tax bills and utility bills. He did not ask for further information about her occupation or sale of the Paris Flat.

Katherine replied with the information requested on 23 April 2019.

First closure notice

The compliance officer completed his check of the return and issued a closure notice by letter dated 21 May 2019 assessing that the higher rates were due.

“The [Paris Flat] became an additional property when you purchased [the London Flat] and the sale of the [Paris Flat] is considered as a sale of an additional property. This means that you did not replace you main residence on the effective date of the [purchase of the London House].

The sale of the [Paris Flat] within the three year period prior to the effective date of the [purchase of the London House] is irrelevant as it was not your main residence.”

Where HMRC went wrong

It seems likely that the compliance officer was led astray by the information in the brief guidance here: “Guidance: Higher rates of Stamp Duty Land Tax”. Here are some extracts:

“You must pay the higher SDLT rates when you buy a residential property (or a part of one) for £40,000 or more, if all the following apply:

  • it will not be the only residential property worth £40,000 or more that you own (or part own) anywhere in the world
  • you have not sold or given away your previous main home
  • no one else has a lease on it which has more than 21 years left to run”

“Do not include anyone who will both:

  • use your new property as their main home
  • have sold or given away the last main home they owned before you buy your new home (or on the same day)”

These suggest that it is only the sale of the immediately previous residence that is of assistance to come within the replacement exception. Katherine had, since living in the Paris Flat, made the London Flat her home.

This interpretation of the rules (that it must be the latest home that was sold) does not accord with the legislation, nor with the more detailed guidance in HMRC’s Manual at SDLTM09800.

Perhaps another problem is that whilst SDLT compliance work used to be carried out by stamp taxes specialists, it is now dealt with by the wider HMRC compliance network. Whilst this has increased HMRC’s capacity to check returns, it means enquiries are often dealt with by officers with little experience of SDLT.

Right of appeal

The letter of 21 May 2019 said what Katherine should do to appeal:

“If you disagree with my decision, you can appeal. You need to write to me within 30 days of the date on this letter, telling me why you think my decision is wrong. I’ll then contact you to try to settle the matter. If we can’t come to an agreement, I’ll write to tell you why. I will then offer to have the matter reviewed by an HMRC officer who hasn’t previously been involved in the case. I’ll also tell you about your right to go to an independent tribunal. If you appeal you can ask for payment of all or part of the tax in dispute to be postponed until the matter is resolved.”

First challenge

Katherine decided to strengthen her appeal by obtaining a second opinion from Counsel; she took advice from Quinlan Windle of Pump Court Tax Chambers. Commenting on the closure notice Counsel said:

“This appears to be a misreading of paragraph 3(6)(c) or paragraph 3(6)(d). It is possible to see how, if one were simply required to construe the phrase “a replacement for the purchaser’s only or main residence”, it is possible to argue that [the London House] was not a replacement for Katherine’s only or main residence at the time of the purchase.

However, paragraphs 3(6) and 3(7) state in terms the circumstances in which a purchased dwelling is a replacement for the purchaser’s main residence. They are detailed provisions and are clearly intended to set out what the phrase means for the purpose of this legislation. Paragraph 3(6)(c) requires only that the sold property has been the purchaser’s only or main residence ‘at any time’.”

Counsel drafted a letter for Katherine to send to HMRC setting out the grounds of appeal. This was sent on 18 June 2019.

Counsel’s comments on appeal process

Quinlan Windle had some helpful comments around the appeal process:

  • If the compliance officer did not accept her initial appeal to him and offered her a review, Katherine had 30 days to accept the offer of a review by an HMRC Officer who had not been involved in the case. If HMRC did not offer a review, Katherine could request one.
  • HMRC have 45 days to carry out the review but they often ask for extensions; if HMRC do not complete the review within 45 days (for example where a request for an extension is refused by the taxpayer) then the review is deemed concluded upholding the earlier decision (leaving the taxpayer with the possibility of appealing to the First Tier Tribunal).
  • There is 30 days to notify the appeal to the First Tier Tribunal from the conclusion of the review (or from when a review is offered, if the offer is not accepted).
  • An appeal to the Tribunal can be made online at and does not require a fee.

Second closure notice

The HMRC officer replied on 26 June 2019. He appeared to take the point that the “sold dwelling” (the Paris Flat) did not have to be the latest main residence, but said in upholding his decision that the higher rates apply:

“The HMRC’s understanding of subparagraph 6(b) and (c) is, in order for these conditions to be met, the major interest disposed of (the sold dwelling) during the 3 year period ending with the effective date of the transaction, has to be your only and main residence “at any time” during the 3 year period prior to the effective date of the transaction.

You confirmed that you did not live in the Paris Flat since July 2010 therefore this was not you’re (sic) main and (sic) only residence in the 3 year period prior to the effective date of the above transaction.

On the effective date of the transaction you purchased [the London House] and held an interest in another dwelling, [the London Flat]. The Higher Rate of Stamp Duty Land Tax is therefore due.”

He offered an internal review by an HMRC officer not previously involved in the case and explained the right to notify an appeal to the tribunal.

Where HMRC went wrong this time

HMRC’s compliance officer overlooked the fact that for purchases completing on or before 26 November 2018 the three year rules did not apply. These three year rules are not mentioned in the brief guidance.

This is even though the transitional provisions are explained quite well in the HMRC Manual at SDLTM09800 and the point had been explained in the letters and enclosures that Katherine sent HMRC.

Second challenge

The compliance officer has a direct dial number, Katherine spoke to him on 8 July 2019 to explain that the three year rules did not apply to purchases completing before 26 November 2018. She said that the legal position was set out in the written advice which she had sent with the initial letter of 21 March 2019. The compliance officer said he would check but asked for it to be put in writing.

Katherine was helped by the same Counsel with her reply of 8 July 2019:

“Thank you for your letter dated 26 June 2019. I understand from your letter that the sole reason you consider the higher rate of SDLT applies is because the Paris Flat was my main residence more than three years before the effective date of my acquisition of the London House (often referred to as “the three year rule”).

The effective date of my acquisition of the London House was 23 May 2018. I understood that s. 128(8)-(9) FA 2016 disapplied the three year rule for transactions with effective dates before 26 November 2018. Contrary to what is stated in your letter I understood HMRC to accept that the three year rule does not apply to transactions with effective dates before 26 November 2018: see the Stamp Duty Land Tax Manual at SDLTM09800 under the heading “Exception to the ‘three year rule’” and “Example 12” at SDLTM09810.

If, having reviewed s. 128(8)-(9) and the guidance to which I have referred, you still maintain that I am liable for the higher rate of SDLT because the Paris Flat was my main residence more than three years before the effective date of my acquisition of the London House, please could you accept this letter as an acceptance of your offer of a review and confirm that you have done so. For the benefit of the reviewer, please could you confirm in writing that you understand the three year rule to apply to a transaction with an effective date of 23 May 2018.”

Third closure notice

It is understood that the compliance officer spoke to a more senior colleague who is familiar with the rules and set him straight. Here is an extract from the letter dated 15 July 2019:

“I have now completed my check of your Stamp Duty Land Tax (SDLT) return for the above acquisition. This letter is a closure notice issued under Paragraph 23, Schedule 10 of the Finance Act 2003. ……. I have reversed my decision of the 21 May and made an amendment to your return to reflect the original amount of SDLT paid. The additional charge of £x has been cancelled. This is because you have acquired the above acquisition before 26 November 2018, therefore the transaction is exempt from the Higher Rate Stamp Duty Land Tax ….”

Improving the guidance?

HMRC’s Stamp Taxes policy team are expecting to review the HRAD guidance on the pages, which you can view here, in August 2019. I am in touch with them to let them know the areas where the guidance is causing problems.

A challenge HMRC face with the guidance is that they are required to keep the language straightforward and provide a simple explanation. This is difficult where the rules are complex and technical, often having arbitrary results.

It has been put to them that it is not satisfactory to have a simple explanation, which whilst it might give the “right answer” in 95 cases out of 100, gives the wrong answer in other cases. This is particularly important where compliance officers are applying the brief guidance literally without referring to the fuller guidance in the Manual or to the legislation, even when they are referred to it.

A key area for improvement will be changing the wording indicating that for the replacement exception it must be the “last main home” that was disposed of and to provide a link to the fuller guidance in the Manual on the replacement exception at SDLTM09800.