Lee Sharpe looks at HMRC’s approach to the 3% ‘extra home’ SDLT charge in England and Northern Ireland and how it has changed over the course of the pandemic.
For those readers subject to stamp duty land tax (SDLT) in England and Northern Ireland, most will probably be familiar with the regime that introduced the higher rates for additional dwellings (HRAD), typically referred to as ‘the 3% surcharge’. Finance Act 2016 updated FA 2003 with a new Schedule 4ZA.
First-time buyers aside, the main route to avoiding the 3% surcharge is by showing that you have simply replaced your main home. But if you are struggling to sell your former main home, then rather than getting too bogged down in considering arguable evidence of how hard you are trying to sell the old property, HMRC basically puts the burden on the taxpayer by adopting a ‘pay now, worry about reclaiming later’ approach.
Time limit for reclaim
The original legislation gives the taxpayer up to 3 years to sell their former main home, then to reclaim the 3% surcharge levied automatically on buying the new property (assuming the previous home is not yet sold).
Let’s take the example of Ethel, who had been living on her own for a few years and had been wanting to downsize after spending 25 years in a family-sized house. In early 2019, she bought the perfect cottage near to her friends and was reasonably comfortable with putting all her savings into the new cottage, being confident she would eventually have sufficient funds for retirement, once the former home was sold. However, the old home needed quite a bit of work doing to it before it could realistically get a decent price – the kind of work best done while empty, and before being put up for sale.
Ethel’s solicitor warned her in early 2019 that she would have to pay 3% extra SDLT on the new cottage, but so long as she sold the old family home by early 2022, she would then be able to reclaim the surcharge. Ethel set about sourcing a reputable builder, and by October 2019 had found a builder and agreed a schedule of works. The builder assured her that work would start in early 2020.
Pandemic problems
As readers will know, the government introduced restrictions on viewing and selling homes from March 2020; although the formal restrictions themselves were lifted within a few months, we have since had to contend with increased demand for home improvement or building materials, set against a fall in manufacturing, and shipping constraints, as the pandemic has been felt around the world.
In Ethel’s case, the work started at the beginning of 2020 was delayed; first by government rules on working on building sites, then postponed for lack of building materials, and then finally because her builder caught the virus and has unfortunately been taking things a little easier since because of ‘long COVID’.
He wants to complete the work, and Ethel likewise wants him to finish the project, but the deadline to sell the old home of early 2022 is imminent. Will Ethel be time-barred if she is unable to sell the old home before the third anniversary of buying her replacement cottage?
Government measures
In June 2020, the government announced it was aware that, since lockdown restrictions were implemented in March 2020, more than 450,000 people had been unable to progress with plans to move house. Furthermore, because of the restrictions placed on the housing market, some people had been unable to sell their previous main residence within the 3-year window allowed to reclaim the 3% surcharge.
The government therefore introduced an extension to the standard 3-year window, which HMRC could grant if an affected taxpayer had been unable to sell their former main residence within three years ‘due to exceptional circumstances outside their control’. However, affected taxpayers would have to make a sale as soon as practicable once that exceptional impediment had ceased to apply (this change applies to taxpayers whose refund window ended on or after 1 January 2020).
Note that the government announcement did not make the measure specific to the events of early 2020, nor to this or future pandemics, but to ‘exceptional circumstances’. Legislation duly followed (in the form of FA 2020, s 76), which included:
‘…if HMRC are satisfied that the purchaser… would have disposed of… the sold dwelling within that three year period but was prevented from doing so by exceptional circumstances that could not reasonably have been foreseen, such longer period as HMRC may allow…’.
HMRC guidance
HMRC’s original guidance said:
‘To be able to get the refund, the delay in selling must be because of reasons outside of your control.
These may be, but are not limited to:
- The impact of coronavirus (COVID-19) preventing the sale.
- An action taken by a public authority preventing the sale.’
Roughly a year later, in June 2021, this changed to:
‘To be able to get the refund, the delay in selling must be because of exceptional circumstances.
These may be, but are not limited to:
- The impact of government-imposed restrictions preventing the sale.
- An action taken by a public authority preventing the sale.’
In other words, HMRC wanted to move away from allowing ‘exceptional circumstances’ in terms of the impact of the pandemic more generally, and instead to draw focus to the finite ‘prohibitions’ aspect of the rules, and in particular how it prevented people who had been trying to sell for some time but just couldn’t quite make it under the wire.
Is Ethel okay?
I think HMRC’s final example in its SDLT manual at SDLTM09807 is quite telling:
‘Ms D purchased her new main residence on 28 March 2017. She followed the government’s Covid-19 advice between 26 March and 13 May 2020 and did not market her property during that time. She started marketing her property for the first time on 14 May 2020 and sold it on 30 June 2020, which is more than three years after the purchase of her new main residence.
At the time that the exceptional circumstances started applying to Ms D, she had not begun marketing her property and there was insufficient time remaining for her to sell her previous main residence during her 3-year period. The exceptional circumstances were not the reason for Ms D not selling the property during the 3-year period and so she is not due a refund.’
Well, clearly not, given HMRC’s protagonist seems to have made no effort to sell the property until the 3-year deadline was basically up. But it would be quite easy for an HMRC officer to see strong similarities between our Ethel and their Ms D; in particular, Ethel was some way off being ready to sell the property when the pandemic struck, and I suspect that HMRC will argue that the government restrictions on actual sale had little direct effect, so Ethel cannot claim ‘exceptional circumstances’.
In its guidance, HMRC argues that a downturn in the market or collapse of a chain will not be regarded as ‘exceptional circumstances’. But, with respect, there is quite a gulf between everyday occurrence and ‘exceptional circumstances’ bar government edict, which HMRC’s examples do little more than skirt around.
Conclusion
There are numerous examples of ‘exceptional’ cases in tax that do not invoke government prohibitions; the old Extra-Statutory Concession D49, dealing with ‘exceptional’ delays in taking up occupation of one’s main residence, for example. In terms of statute, there is the test for residence and presence in the UK due to exceptional circumstances; HMRC gives examples in its Residence, Domicile and Remittance Basis manual (RDRM13200) of:
- Local or national emergencies, such as civil unrest, natural disasters or outbreak of war.
- Sudden or life-threatening illness or injury.
which really only echoes the legislation’s list of possible examples (at FA 2013, Sch 45, para 22(5)).
I suspect HMRC would try to refuse Ethel’s claim on the basis that any sale is too far from the point of government intervention. But I also think that a tribunal would be more open to considering whether Ethel’s circumstances counted as ‘exceptional’ in a much broader sense, and might well allow Ethel’s claim.
