Potential claims for SDLT errors could cause a professional indemnity crisis

– with premiums rising up to 30% in 2021

Last month, an industry reforming technology was launched for the legal profession, protecting property lawyers and conveyancers against an ongoing professional indemnity crisis surrounding SDLT.

Evolving at speed across the nation, residential conveyancing remains the area of practice where most insurance notifications are received, with residential and commercial cases combining to represent a near 51% of all incoming matters. Market commentary indicates that across the industry, many law firms are facing an increase of 20%-30% on annual PI premiums, driving down the incentive to generate new business and posing a viable threat to the future of many firms.

The SDLT Problem

Each year, an estimated £2 billion of SDLT is overpaid to HMRC due to the complicated and often confusing nature of the tax. In the last year, just one of many stamp duty advisory firms alone has successfully recovered over £14m on behalf of its clients, the majority of which are individuals incorrectly paying thousands of pounds of unnecessary tax.

One of the main areas of concern relates to missed Multiple Dwellings Relief – with many clients claims against firms springing up in the past twelve months. A major reason that many calculations result in mistakes, is due to HMRC’s own ‘SDLT Calculator’ lacking many of the nuances necessary to deal with a whole variety of UK property transactions – from mixed-use purchases, to acquisitions of land for development. There are now 49 different reliefs, many of which are little known, making it very challenging for property professionals to calculate the correct rate of SDLT for each transaction.

These errors often cost clients thousands of pounds each time and, if discovered after HMRC’s four year period for reclaims, they can lead to solicitors and conveyancers facing significant potential negligence headaches, including ever-rising PI premiums. This has led to predictions that premiums could rise by as much as 30% this year as insurers ask for more information up-front.

The Solution

In order to provide solicitors and conveyancers with a simple way to ensure SDLT calculations are correct, SDLT Compass software application has been developed in partnership with several leading SDLT specialists. It offers a one stop application that produces accurate SDLT calculations and screens for exemptions for all client transactions. The application also provides a detailed audit trail to the specifications mandated in the latest CQS and Law Society tax guidance.

To find out more about Compass and some of the issues that it deals with you can visit the website here.

Chris Ward, Managing Director of Compass, said:

“After a lot of research and user-testing, we are pleased to be launching the UK’s first, fully comprehensive, SDLT calculator for property lawyers and conveyancers. Compass will help ensure property purchasers pay the correct amount of SDLT utilising all available reliefs whilst taking full PI responsibly and at the same time ensuring CQS standards are fully complied with by the user firm.”

Rob Hailstone CEO, Bold Legal Group, commented:

“SDLT calculation is more complicated and exposes you to more risk than ever before. Avoiding underestimated or overestimated SDLT is vital. HMRC’s own ‘SDLT Calculator’ lacks many of the nuances necessary to deal with a whole variety of UK property transactions, from mixed-use purchases to acquisitions of land for development. Compass gives you the answers you need without the hassle of considering dozens of irrelevant details.”

Sarah Keegan, CS Partnership, added:

“Conveyancers have to deal with so much risk – it seems a no brainer to me to protect yourself from the risk of future SDLT claims, whilst complying with the CQS requirements, and ensuring that your clients are receiving the best advice and service.”

Examples of cases identified by Compass

Mixed Use

Mr. C had purchased his new main residence for £1,750,000.

The solicitor advised that the residential rate of SDLT applied to the acquisition of his new main residence and as a result, he paid £176,250 in SDLT. After analysing the property in detail, it was determined there was additional woodland to the rear that was to be preserved and not used for the purposes of his main residence.

It was explained to HMRC there had been an overpayment of SDLT and accordingly, the client obtained a refund of £99,250 plus interest.

Annex: Multiple Dwellings Relief claim

Miss S purchased her main residence for £500k that had a self-contained annex attached. She was advised to pay the residential rate of SDLT and paid £15k however Multiple Dwellings Relief applied to the transaction and HMRC refunded £10,000.

Uninhabitable

K Limited purchased an investment property on 11 April 2018 for a total consideration of £180,000.

At the time of completion, the property was in an uninhabitable state and had been vacant for a number of years prior to purchase.

Upon a review of the transaction, it was identified that since the property was not suitable for use as a dwelling at the time of completion it should be classed as non-residential and the client due a refund of £5,900. HMRC was informed on the 5 February 2021 and a refund obtained for the client from HMRC on 4 March 2021 for a sum of £5,984.78 (£84.78 accrued interest).

Probate: Relief for Property Traders

S Limited purchased a property on 3 January 2020 for a total consideration of £490,000 and paid SDLT of £29,200 (additional residential rate).

At the time of completion, the client had no intention of spending more than the permitted amount on refurbishing the property and they eventually sold the property to a third party in July 2020. As a result, relief was available at the time of completion and the SDLT amount payable should have been £nil.

HMRC was informed on the 4th December 2020 with a request to amend the return on the basis that relief was available and the client was entitled to a full refund of SDLT. On 4 January 2021, the client received a refund from HMRC for a sum of £29,342.80 (£142.80 accrued interest).

Partnerships : Connected Parties

Mr and Mrs L held a property in a property investment partnership and transferred the property into a connected pension trust scheme. The property was transferred at market value on 4 May 2016 for a consideration of £580,000 and SDLT of £18,500 was paid.

It was identified that since the transaction was a transfer from a partnership to a connected pension trust scheme, no SDLT was due and no return was required as it was not a notifiable transaction.

HMRC were provided with an explanation as to why the client was due a full SDLT refund and agreed with the analysis and refunded £18,500 (plus £352.77 accrued interest) on 3 March 2020.

If you would like more information about SDLT Compass please contact [email protected]

Today's Conveyancer