Amid a recent drastic increase in property transactions and in light of increased claims in this area, we asked SDLT Compass, expert advisers on the subject, to highlight the key risks of SDLT and how best conveyancers can handle these.

As one of the areas of work with the most PI claims, conveyancers face many risks, and these vary widely from project to project. PI claims range from failure to comply with undertakings or advise clients appropriately, to failure to deal with AML and spot fraudulent buyers or sellers. Many claims also surface around missed deadlines or time limits – the list goes on.

But there is one risk that has until recently gone under the radar. Despite stamp duty being around for the past 17 years, it remains a complex and continually challenging tax in comparison to its 'duty on a document' counterpart that it replaced.

Currently, there are thousands of overpayment claims filed by claims farmers and their solicitors often concerning multiple dwelling relief, but this represents the tip of the iceberg, with conveyancers holding all the risk.

The SDLT refunds sector (not to be confused with the claims farmers) actively seek out and reclaim from HMRC. One leading firm has recovered over £12M of overpaid SDLT in the last 12 months, even though they see a fraction of the transactions in the UK each year. They confidently consider that at least a third of SDLT returns may be incorrect. The concern is – how many returns are passing under the radar, only to turn up as a claim against the conveyancer in a year's time?

Much of this problem is related to mixed use properties, where owners fail to assess the right consideration, or fail to claim one of the 49 possible reliefs.

This tends to occur simply because as humans, we are not naturally well-equipped to assess and handle risk. As a result, we have a tendency to move in one direction, doing what we have always done until we hit a problem – and SDLT is one big iceberg of a problem.

Time and time again, otherwise experienced and very competent conveyancers are failing to spot these problems or appreciate the complexity involved.

Sometimes it is underpayment, sometimes overpayment, and sometimes the problem comes from a lack of appreciation for the property's physical state or historic use. Sometimes this comes from a lack of awareness on the reliefs or the need to pay additional tax, or not calculating the tax correctly – the list goes on.

There is a common tendency for conveyancers to think that they can spot cases that are not 'straightforward', but the problem we see is the 'unknown unknowns'. Conveyancers cannot know what they don't know, and sometimes they turn a blind eye to red flags that call for further thought.

In contrast, no conveyancer would consider it unnecessary to do client ID or AML checks, or think that it was only necessary to carry them out on risky clients, because they have come to appreciate that you can't always spot them.

SDLT Compass can help here, it gives you the tools to handle the risk, pay the right tax and point you in the right direction when you need specialist advice. Using Compass on every residential transaction allows conveyancers to spot any red-flags, and ensure they have complied with the CQS requirement for an audit trail and independent verification.

Added to this, given the growing concerns of insurers around the rising tide of SDLT claims, firms with a process in place to manage and contain this risk will likely be looked on favourably by insurance carriers.

To give a flavour of the typical mistakes made around SDLT, here is just a small selection of the many cases we have come across recently:

1. Mixed use

1. Mr G purchased a property in September 2020 for a total consideration of £1.4m. At the time of completion, the property comprised of three bedrooms with formal gardens and 11 acres of fields adjacent to the property. In addition, there was a water treatment plant located within the 11 acres of field which facilitates that property and the neighbouring property to which regular payments are made for maintenance.

Upon a review of the transaction, it was identified that the site should have been classed as mixed use and the client due a refund of £8,750. As a result, a letter was sent to HMRC on 7 May 2021 asking for the return to be amended to reflect this.  HMRC subsequently issued a refund on 8 June 2021 for a sum of £8,779.85 (£29.85 interest accrued).

2. Mrs D purchased a property in January 2021 for a total consideration of £3.6m and paid an SDLT liability of £372,750 (additional residential rate).​

Upon a review of the transaction, it was noted that the property is set in over 16 acres of land and comprises of a six-bedroom property, detached garage, outbuildings, 4 acres of formal gardens and 12 acres of mature woodland. Since the 12 acres of mature woodland is outside the boundary of the formal gardens, the transaction should have been classed as 'mixed use' and the client was due a refund of £225,250. 

A letter was sent to HMRC on 1 April 2021 asking for the return to be amended on the basis that the property was incorrectly classed as residential and not as mixed use. On 30 April 2021, a refund was received from HMRC for a sum of £225,561.65 (£311.65 accrued interest).

2. Annexe: multiple dwellings relief claim

1. Mr S purchased a property in October 2020 for a total consideration of £775,000. The land consists of a four-bedroom property along with a self-contained annexe and a garden. The annexe comprises of a separate entrance and includes a kitchen, living area, bathroom and a bedroom.

A review of the transaction identified that multiple dwellings relief was available on completion and the client due a refund of £6,000. A claim to amend the SDLT return was sent to HMRC on 28 May 2021 and HMRC issued a refund to on 17 June 2021 for a sum of £6,018.90 (£18.90 interest accrued).

2. Mr B purchased a property in October 2020 for a total consideration of £1,275,000. The land consisted of a two-bedroom property along with a self-contained annexe and a garden. The annexe comprised a separate entrance and includes a kitchen, living area, bathroom and a bedroom.

A review of the transaction identified that multiple dwellings relief was available on completion and the client was due a refund of £42,500. A claim to amend the SDLT return was sent to HMRC on 26 April 2021 and HMRC issued a refund on 25 May 2021 for a sum of £42,584.19 (£84.19 interest accrued).

3. Uninhabitable

Mr W purchased a property in August 2018 for a total consideration of £150,000. At the time of completion, the property was in an uninhabitable state as it had been unoccupied for a number of years and was dilapidated. The walls and floors were stripped bare and there were no bathroom or kitchen facilities within the property.

A review of the transaction identified that since the property was not suitable for use as a dwelling at the time of completion, it was in fact non-residential and the client was due a refund of £5,000. A letter was sent to HMRC on 23 April 2021 requesting a refund as the client made an overpayment in SDLT.  A refund was received from HMRC on 26 May 2021 for a sum of £5,067.47 (£67.47 accrued interest).

4. Probate: relief for property traders

J Limited purchased a property in July 2020 for £117,500 and paid an SDLT liability of £3,525 (additional residential rate).​

On the effective date of the transaction the property was sold through probate and purchased by a property trading company. At the time of completion, the purchaser had no intention of spending more than the permitted amount on refurbishing the property and intended to sell the property to a third party in due course. As a result, relief was available to the client at the time of completion and the SDLT amount payable should have been £nil.

A letter was sent to HMRC on 5 March 2021 asking for the return to be amended on the basis that relief was available and that the client was entitled to a full refund of SDLT. A refund was received from HMRC for a sum of £3,535.91 (£10.91 accrued interest) on 30 March 2021.

5. Partnerships: connected parties

Mr L, Mr P and Mr C held a property in a property investment partnership and transferred it to a connected property investment partnership known as the A SASS. The trustees of the A SSAS are Mr L, Mr P and Mr C. The property was transferred at market value in January 2020 for a consideration of £525,000 and SDLT of £15,750 was paid.

It was identified that since the transaction was a transfer to a connected property investment partnership, certain partnership provisions applied to this transaction and as such, no SDLT was due.

A letter was sent to HMRC on 30 October 2020 asking for the return to be amended.  A refund was received from HMRC for a sum of £15,860.25 (£110.25 interest accrued) on 14 June 2021.

6. Multiple dwellings relief

SH Limited purchased a site in March 2021 for a total consideration of £2.8m. At the time of completion, the land had the benefit of planning permission to demolish the existing commercial building and construct 30 residential dwellings along with an access road.

A review of the transaction identified that the site should have been classed as mixed use and that multiple dwellings relief was also available at the time of completion. A letter was sent to HMRC on 7 May 2021 asking for the return to be amended to reflect this.  HMRC subsequently issued a refund on 14 June 2021 for a sum of £299,167.59 (£331.59 interest accrued).

SDLT is much more complex than is commonly expected and needs expert help to calculate the right tax and file the right tax return. SDLT Compass can remove one of the growing conveyancing risks. If you would like to hear more, contact Hannah Mackinlay.