Taxation and Trusts: Stamp duty holiday not behind house price rise?

Contents:

• New late payment interest and penalties
• Stamp duty holiday not behind house price rise?
• SDLT relief for multiple dwellings - a recent tax case

 

New late payment interest and penalties

(AF1, AF2, JO3, RO3)

The Government started consulting on this back in December 2017. After some delay, the reforms are now due to come into effect:

• for VAT taxpayers from periods starting on or after 1 April 2022;
• for taxpayers in Income Tax Self Assessment (ITSA), from accounting periods beginning on or after 6 April 2023 for taxpayers with business or property income over £10,000 per year (that is, taxpayers who will be required to submit digital quarterly updates through Making Tax Digital for ITSA);
• for all other ITSA taxpayers, from accounting periods beginning on or after 6 April 2024.

Late payment penalties

The new late payment penalties will apply to payments due from VAT businesses and ITSA taxpayers. For ITSA taxpayers, the new regime will replace the current late payment penalties in Schedule 56 of the Finance Act 2009 (Schedule 56 of FA 09). For VAT businesses, it will replace the Default Surcharge, which served as a combined late submission and late payment sanction.

There are two late payment penalties that may apply: a first penalty; and then an additional or second penalty, with an annualised penalty rate.

The taxpayer will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. If tax remains unpaid after Day 15, the taxpayer incurs the first penalty. This penalty is set at 2% of the tax outstanding after Day 15. If any of this tax is still unpaid after Day 30, the penalty will be calculated as 2% of the tax outstanding after Day 15 plus 2% of the tax outstanding at Day 30. In most instances this will amount to a 4% charge at Day 30.

If tax remains unpaid on Day 31, the taxpayer will begin to incur an additional penalty on the tax that remains outstanding. It accrues on a daily basis, at a rate of 4% per annum on the outstanding amount. This additional penalty will stop accruing when the taxpayer pays the tax that is due.

Time-to-Pay arrangements

HMRC will offer taxpayers the option of requesting a Time-To-Pay (TTP) arrangement. This enables a taxpayer to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax. A TTP arrangement, if agreed, has the same effect of paying the tax and stops penalties accruing from the day the taxpayer approaches HMRC to agree it, as long as the taxpayer continues to honour the terms of the TTP agreement. The effect of a TTP is shown in this chart:

Days after payment due date	Action by taxpayer	Penalty
0-15	Payments made or TTP is proposed by Day 15 and then agreed	No penalty is payable
16-30	Payments made or TTP is proposed by Day 30 and then agreed	Penalty will be calculated at half the full percentage rate (2%)
Day 30	Some tax is still unpaid, no TTP agreed	Penalty will be calculated at the full percentage rate (4%)

If tax is still unpaid on Day 31 a second, additional penalty will start to accrue at 4% per annum.

HMRC has discretionary power to reduce or not to charge a penalty for late payment if it considers that appropriate in the circumstances. This will include where there are special circumstances that cause a taxpayer to pay their tax late. 

HMRC says that it recognises that moving to the new system of late payment penalties is a significant change for some taxpayers, especially those who might have more difficulty in getting in contact with HMRC within 15 days of missing a payment to begin arranging a TTP agreement. HMRC will therefore take a “light-touch approach” to the initial 2% late payment penalty for taxpayers in the first year of operation of the new system under both VAT and ITSA.

Where a taxpayer is doing their best to comply, HMRC will not assess the first penalty at 2% after 15 days, allowing taxpayers 30 days to approach HMRC in the first year before HMRC charges a penalty. However, if a taxpayer has not approached HMRC by the end of Day 30 and there is still an amount of tax outstanding, the first penalty will be charged according to 2% of the amount outstanding at Day 15 plus 2% of what is still outstanding at Day 30. In most instances this will amount to a 4% penalty.

Additionally, there is no penalty due if the taxpayer has a reasonable excuse for late payment. If HMRC is satisfied a taxpayer has a reasonable excuse HMRC will agree not to assess. This will prevent the taxpayer from unnecessarily having to appeal.

HMRC also has discretionary power to reduce or not to charge a penalty for late payment if it considers that appropriate in the circumstances. This will include where there are special circumstances that cause a taxpayer to pay their tax late. HMRC will actively consider all cases where this might be the case.

If HMRC decides not to use its discretionary power or does not agree that a taxpayer has a reasonable excuse for late payment, the taxpayer must use the appeals and review process to challenge a penalty. Where the reasonable excuse for late payment comes to an end, the taxpayer will not incur a late payment penalty if they then pay the tax promptly.

Reviews and appeals

A taxpayer will have the right to appeal against each late payment penalty that is assessed. They can challenge an assessment both through an internal HMRC review process and also by an appeal to the courts (the First-tier Tax Tribunal). The grounds for appeal may vary and include having a reasonable excuse for missing a filing deadline. The appeal process will be the same as the appeal process against an assessment of the tax on which the penalty is based.

Interest harmonisation

HMRC will charge late payment interest (LPI) on tax that is outstanding after the due date, irrespective of whether any late payment penalties have also been charged. The LPI will apply from the date the payment was due until the date on which it is received by HMRC. LPI will be calculated as simple interest at a rate of 2.5% + the Bank of England base rate.

Where a taxpayer has overpaid tax, HMRC will pay repayment interest (RPI) on any tax due to be repaid (the difference between the amount due and the amount paid) either from the last day the payment was due to be received or the day it was received, whichever is later, until the date of repayment. RPI will be paid at the Bank of England base rate less 1% (with a minimum rate of 0.5%).

Note that LPI will continue to accrue on amounts not paid on time even if those amounts are included in a TTP arrangement.

 

Stamp duty holiday not behind house price rise?

(AF1, RO3) 

The latest Resolution Foundation quarterly Housing Outlook report suggests that the stamp duty holiday is not behind the rise in house prices.

The temporarily increased nil rate band to £500,000 for residential Stamp Duty Land Tax (SDLT) ended on 30 June 2021. It has now reduced to £250,000 until 30 September 2021 and will further reduce to £125,000 from 1 October 2021.

The latest Office for National Statistics (ONS) UK House Price Index shows the average value of a UK home increased by 13.2% from June 2020 to June 2021. 

However, the Resolution Foundation report suggests that the rise in house prices has been fuelled by low interest rates and the ‘race for space’ as people move away from cities into rural areas, rather than by the stamp duty holiday.

The Resolution Foundation accepts that it is reasonable to expect at least part of the savings from any transaction tax holiday to be capitalised into house prices (an HMRC evaluation of the SDLT cut introduced for first-time buyers in wake of the financial crisis estimated that between 50% and 70% of the value fed through into higher house prices, for example).

But, it argues, if the cuts to transaction taxes have been the overwhelming driver of the house price trends observed over the past 12 months, you would expect to see higher growth in areas where the savings from the change in policy have been most significant as a share of the house price. Instead, prices have grown by more in those local authority areas where the average buyer experienced negligible, if any, savings as a result of a transaction tax holiday, compared with areas where far higher savings were achieved (13% in savings quintiles 1 and 2 compared to 7% in quintile 5). 

The think tank also considered that the tax holiday was actually ‘wasteful’ for HMRC with the Exchequer losing around £4.4bn in taxes in England and Northern Ireland as a result, although the Treasury has said that the policy ‘saved jobs’ by ‘stimulating the housing market’.

The research found that 44% of respondents felt that the impact of Covid-19 has made living in a city less appealing with 10% of respondents having moved away from a city or urban area in the last 12 months and almost a quarter, 24%, no longer commuting into a city for work.

For the last few decades, the pace of price growth in UK cities far outstripped that of rural areas, but the rise in home working has caused house prices in rural areas to skyrocket due to the demand. According to the property site Rightmove, Wales has seen the biggest increase with a 2.3% rise in the last month and a 10.9% increase year-on-year.

The think tank stated that the trend of a ‘more attractive rural lifestyle’ looks set to continue.

 

SDLT relief for multiple dwellings - a recent tax case

(AF1, RO3)

The latest Stamp Taxes Newsletter covers a recent case on Multiple Dwellings Relief.

HMRC recently published the August 2021 edition of the Stamp Taxes Newsletter which covers changes to stamp duty on shares prices and modernisation of the stamp taxes on shares framework. Other points covered by the Newsletter include:

• the guidance on stamp duty group relief has been updated;
• the Government has published a Summary of Responses following the second-stage consultation on potential reforms to the tax treatment of asset holding companies in alternative fund structures;
• the conditions under which a taxpayer information notice may be given for the purposes of Stamp Duty Land Tax (SDLT) have been extended; and
• a reminder that from 1 October 2021, the SDLT nil rate band will return to £125,000.

Finally, the newsletter also covers recent SDLT tribunal decisions.

Interestingly, the case of HMRC and Fiander & Brower was the first time that a Multiple Dwellings Relief (MDR) case focusing on ‘suitability for use’ had been considered by the Upper Tribunal.

In the case in question, a main house and a granny annex were connected by a short corridor. There was no lockable internal door at the effective date. The First-tier Tribunal held that the acquisition of a property that included an annex connected to the "main" house by a corridor that lacked an internal door did not qualify for MDR from SDLT.

The Upper Tribunal dismissed the appeal, agreeing with the approach taken by the First-tier Tribunal.

When considering ‘suitability for use’ as a dwelling for MDR purposes, it is necessary to consider what an objective observer’s perspective would have been at the effective date of the transaction. So, with this in mind, it is necessary to consider whether the dwelling is suitable for residential accommodation generally so should have basic living facilities and whether it is a separate self-contained unit with independent access. Broadly this is an objective test and all facts and circumstances must be considered.

MDR in summary

You can claim relief when you buy more than one dwelling where a transaction or a number of linked transactions include freehold or leasehold interests in more than one dwelling. If you claim relief, to work out the rate of tax HMRC charge:

• divide the total amount paid for the properties by the number of dwellings;
• work out the tax due on this figure; and
• multiply this amount of tax by the number of dwellings.

The minimum rate of tax under the relief is 1% of the amount paid for the dwellings.

Example

You buy 5 houses for £1 million.

£1 million divided by 5 is £200,000.

The amount of SDLT you pay on £200,000 is £1,500 (0% of £125,000 + 2% of £75,000).

£1,500 multiplied by 5 is £7,500.

As this is less than 1% of £1 million (which is £10,000), the amount of tax you pay is £10,000.

Higher rates of SDLT might be charged from 1 April 2016 on purchases of additional residential properties.

You can find out more in the HMRC SDLT manual.

There have been several recent First-tier Tribunal decisions which have considered claims for MDR relating to annexes, which have all broadly followed the approach taken in Fiander & Brower.

 

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