SDLT: Lawyer’s risk management
As published in Winslows Digital Tax Magazine, The Wize. To subscribe for free, please click here.
The evolving nature of SDLT case law, both in respect of “mixed use” treatment and the meaning of what amounts to a “dwelling” in the first place (as discussed in June’s issue of WIZE.) makes it crucial to evaluate each transaction carefully on its own facts.
Insurers report that SDLT negligence claims against property lawyers are at an all-time high. This recent spike being partly due to the advent of SDLT refund companies pro-actively seeking out clients who have overpaid SDLT. In such a situation there are several risks at play for property lawyers and their clients.
1. A client is identified that has potentially overpaid SDLT and is not time barred from applying for a refund.
Where a qualifying transaction is not time barred from qualifying for a refund, a refund company may assist the client to obtain a return of SDLT. Beware however, that a high percentage (as much as 25%) of the SDLT recovered can be charged as a fee by refund companies. This has resulted in clients seeking to sue their property lawyers for damages equal to the 25%!
In the event your client believes they have overpaid SDLT and needs expert assistance to recover funds, Winslows Tax is able to assist our property lawyers colleagues without success fees or premiums. Simply expert assistance provided in a cost effective manner. Winslows’ track record in recovering funds for clients is exceptional.
2. A client is identified that has potentially overpaid SDLT, and is time barred from applying for a refund.
In such instances a client may be informed that they have overpaid SDLT, but that its too late to apply for a refund (the time limits for doing so being dependent on the specifics of the transaction).
Some SDLT refund companies have now started to partner with litigation lawyers to help clients sue their property lawyers for the amount of overpaid SDLT that is not recoverable from HMRC.
Of course, clients who have received a negligent legal service, should be entitled to redress. However, as the recent line of Tax Tribunal cases (on the meaning of what constitutes a “dwelling” for SDLT purposes) shows us, not every SDLT refund application/case has technical merit, and some have even been held to be quite spurious by the Tribunal.
Therefore, if your firm is notified of a potential SDLT negligence case being brought, the first step is to carry out a technical assessment, both of the underlying SDLT analysis and your firm’s responsibilities under the relevant engagement documents. Winslows Tax can assist property law colleagues with an independent review of the matter on a confidential basis.
3. A client has asked you to execute a property transaction in a particular way, based on advice from SDLT planners/scheme providers.
Whilst there are certainly ways to structure transactions to ensure that they are tax efficient but also compliant with SDLT law and HMRC accepted practice, there are many forms of SDLT planning arrangements, which HMRC deem to be non-compliant aggressive forms of tax avoidance.
Each proposed transaction structure must be carefully considered on its own facts. In particular, property lawyers (and other professionals) must ensure that they do not fall foul of the rules on the ‘Enabling’ of abusive tax arrangements, set out in Schedule 16 Finance Act (No. 2) 2017. If you are unsure as to whether the transaction can legitimately be executed as proposed by the client, contact Winslows for an independent opinion.
Scenarios to take tax advice/common negligence claims
- Incorrectly applying the 3% surcharge to a purchaser who does not fall within all of the required conditions
- Falling to apply for a refund of the 3% surcharge, when a Main Residence is subsequently sold after a relevant purchase
- Charging a transaction to the residential property rates of SDLT rather than the commercial rates, in situations where a transaction includes both types of property
- Incorrectly taxing certain property annexes as Additional Dwellings subject to additional rate SDLT
- Failure to apply the ‘six-or-more’ rule enabling residential properties of that number to be charged to commercial rates of SDLT rather than residential rates
- Failing to apply Multiple Dwellings Relief correctly to reduce the SDLT payable. Including situations where properties include a “granny annex”
- Failing to correctly apply lease overlap relief in situations where you have acted for a client that has surrendered a lease at the same time as taking a new lease of the same property
- Failing to correctly apply either Sub-sale relief or SDLT group relief