The recent First-tier Tribunal (FTT) decision of G Goldsmith Ltd and Anor v HMRC [2024] UKFTT 00927 (TC) contains a salutary lesson of the impact of underestimating stamp duty land tax (SDLT). 

The facts

Mr Gia Goldsmith exchanged contracts to buy a house for £1,450,000. He and his siblings intended to convert it into three self-contained flats to exploit as a source of rent. They had done similar conversions at four other neighbouring properties. The work was carried out and the new flats were let. After exchange, Mr Goldsmith was told that a cheaper mortgage would be available if the property was purchased in the name of a company. He therefore set up a company and assigned the sale contract to it. The company completed the purchase and paid £132,250 of SDLT.

Before completion, the company sought permission from the seller to renovate the property. The seller gave permission subject to conditions. The seller did not give permission for the buyer to go into possession. The buyer was only allowed to carry out the works on specified days during specified hours. And the buyer had to pick up the key from the seller’s representative at the beginning of each day and return it to the representative at the end of each day.

Roughly six months after completion, a firm of tax specialists amended the company’s SDLT return to claim multiple dwellings relief (MDR) (former Sch 6B, Finance Act (FA) 2003). Although not relevant to this case, it is worth noting that MDR was abolished with effect for transactions on or after 1 June 2024. HMRC refunded £46,252 in response. The company’s claim relied on showing that the property was ‘in the process of’ being adapted for use as three dwellings at completion (para7(2)(b)). HMRC opened an enquiry into the amended return before closing it and giving effect to its conclusion that the relief was not available. The company requested HMRC to review its decision or HMRC offered the company to review it – it is not clear which – and HMRC upheld the original decision. The company appealed the review conclusion notice.

The issues

During the review, the reviewing officer notified the original officer that the contract had not been signed by the company but by Mr Goldsmith. In response, the original officer made a discovery assessment on the basis that Mr Goldsmith was liable to pay SDLT. This is because completion also gave rise to a notional SDLT transaction – an acquisition by Mr Goldsmith. This was for two alternative reasons: Mr Goldsmith having assigned the contract or him having accessed the property early. Mr Goldsmith appealed the discovery assessment.

In correspondence relating to the discovery assessment, the appellants’ representative asserted that the works carried out to the property were materially in excess of those permitted, so Mr Goldsmith was a trespasser and could not be in ‘possession’ of the property. The asserted works, which the FTT accepted had been carried out between exchange and completion, included structural works to convert the house into three flats.

The FTT found that Mr Goldsmith had not “substantially performed” the contract by carrying out the works. It adopted a purposive interpretation of the relevant part of the SDLT legislation (s44(4), FA 2003). The purpose of substantial performance is to deny ‘resting in contract’ structures that were prevalent under stamp duty (SDLT’s predecessor). The FTT remarked: “Bearing in mind the purpose of the section [FA 2003 s 44(4)], in my view ‘taking possession of the subject matter of the contract’ [the relevant condition for substantial performance] requires the buyer to go into occupation of the property as if they had become the owner at that point. They may have to comply with conditions or limitations under the contract, lease, licence or other agreement, but there must be an element of freedom to occupy as and when they wish, including all the time, a right to any rents from the property if relevant (specifically dealt with in section 44(6)(a)) and generally, responsibility for the property and liability for the outgoings. As HMRC puts it in its SDLT Manual [SDLTM07900], the purchaser ‘obtains “the keys to the door” and is entitled to occupy the property’.”

The FTT found that Mr Goldsmith had not “obtained the keys to the door” literally or figuratively due to the conditions its permission to access the property was subject to.

It also found that the property was in the process of being adapted at completion; hence, the company was entitled to MDR.

A pre-completion transaction

So far so good: the company succeeded in claiming the relief and Mr Goldsmith was not liable to SDLT due to him accessing the property early. But for one thing, other than some judicial comments confirming the meaning of substantial performance, this decision would not have been remarkable. That thing is this: the FTT accepted HMRC’s assertion that completion of the contract gave rise to a notional SDLT transaction. This is a consequence of Mr Goldsmith having assigned the contract. It engaged a complex part of the SDLT regime for pre-completion transactions (Sch 2A, FA 2003). This should not have been an issue. A relief applies to provide a complete exemption from charge (subject to meeting certain conditions), but the relief needs to be claimed in an SDLT return.

In this case, no such return was made and the timing of HMRC’s challenge meant that it was too late to claim the relief. As a result, Mr Goldsmith had to pay SDLT in respect of completion as well as the company and two lots of tax were paid on a single amount of consideration. The FTT accepted that Mr Goldsmith had no idea that there was any SDLT transaction other than the purchase by the company or that he had to submit a return. Nor it seems did their adviser.

The FTT remarked: “It seems extremely harsh of HMRC to seek to tax Mr Goldsmith on the full amount of the SDLT without any reliefs, when the Company has already paid the correct amount of SDLT on the purchase of the Property. Effectively they are collecting double tax on the same transaction. I recognise that Mr Goldsmith and a company owned by Mr Goldsmith are different legal persons and that Mr Goldsmith could have claimed relief and avoided the charge. HMRC are acting in accordance with the letter of the law, but it is with some reluctance that I dismiss Mr Goldsmith’s appeal on the pre-completion transaction point.” 

So, although the company could keep the £46,252 refund, Mr Goldsmith had to pay £132,250 of SDLT (plus interest).

But for applying for the £46,252 repayment, it is unlikely that HMRC would have made a discovery assessment – although this does not mean that Mr Goldsmith would not have been liable to pay the £132,250.

Words of warning

The takeaway is not to underestimate SDLT. There are a variety of situations where there may be a land transaction in the ‘SDLT world’, but no such transaction in the ‘real world’. These ‘notional transactions’ can be easily missed (by both taxpayers and HMRC) as they are not enforced by registration in the same way that most real world transactions are. Apart from taking possession of a property between exchange and completion, other examples of these can include in certain circumstances:

• The withdrawal of money or money’s worth from a partnership (para 17A, Sch 15, FA 2003).
• The repayment of a loan made to a partnership by a partner or a connected person (para 17A, Sch 15, FA 2003).
• A sale of an interest in a property-investment partnership (para 14, Sch 15, FA 2003).
• The acquisition or increase of an entitlement to share in the income profits of a partnership however passive (eg, arising on the death or retirement of a partner) (paras 14 and 17, Sch 15, FA 2003).
• Lease variations that do not take effect as a surrender and regrant (para 15A, Sch 17A, FA 2003).
• The completion of a contract giving a person an entitlement to direct or request a landowner to transfer the land to him or a person who is not a party to the contract (eg, a contract for a development licence) (s45A, FA 2003).

The consequence of failing to notify HMRC in respect of such a transaction (if notifiable) is a 20-year assessment period and being liable to pay interest at HMRC’s late-payment rate and a tax-geared penalty.

Sean Randall, CTA (Fellow), independent stamp duty expert, editor and author of Sergeant and Sims on Stamp Taxes, and chair of the Stamp Taxes Practitioners Group. He can be contacted at sean@seanrandalltax.com and on +44 (0) 20 3442 9742.