HM Revenue & Customs has been warned by financial experts that its latest crackdown on stamp duty abuse could make the house buying process even more expensive.
The Chartered Institute of Taxation says it backs the crackdown in principle, but fears the unitended consequence could be to make the process more protracted and stressful.
The crackdown applies to mixed-use property purchases - for example a country house with some land let for grazing, or food shops with flats above, or some pubs and Bed & Breakfast homes combined with workplaces.
HMRC fears that the tax rules for such mixed-use property transactions are exploited by some purchasers to unfairly reduce SDLT payable, despite the purchase not containing any meaningful commercial element.
This is because purchases of mixed-use property are currently wholly charged to the non-residential rates of SDLT, which are much lower than the residential rates - even where only a small proportion of the property is non-residential in nature.
So instead, HMRC suggests that would be airer to require purchasers to apportion the property: this means residential rates of SDLT would be paid on the part of the purchase price apportioned to residential land, and non-residential rates paid on the part of the purchase price apportioned to non-residential land.
Marc Selby - the chair of the Chartered Institute of Taxation commercial taxes committee - says:“This proposal is a workable solution to stop people classifying their transactions as mixed-use when what they are buying is really a residential property, but it has significant drawbacks.
“Apportionment will add more stages into a calculation that is already a complicated area of tax law, especially for conveyancers, most of whom are not tax experts.
“The need for a valuation would extend to more transactions than currently required, potentially adding costs and compliance risk given the inherent uncertainty in valuation and extending the time for completing purchases. The home buying and selling process is already potentially expensive, time consuming and stressful.
“HMRC’s plan will remove unfairness in the system because currently a country estate could pay a lower rate of SDLT, just because it has some small commercial element, than a three-bedroom semi-detached property in London.
“But the problem is that HMRC’s proposed method of apportionment brings in other types of unfairness resulting in a disproportionately high SDLT cost for a relatively low value residential property bought with commercial property - say a valuable farm with a modest house or an office block with a caretaker’s flat."
Selby continues: “Introducing apportionment could generally lead to a higher rate of SDLT on mixed-use transactions than is paid currently. Recent HMRC research points out that increasing SDLT on purchases of commercial property can lead to a decrease in transactions.
“The CIOT suggests this unfairness could be overcome by an alternative apportionment method that taxes the residential element at rates appropriate to the consideration for the residential element only."