HMRC explicitly singled out SDLT tax avoidance schemes in 2010 when it published its first Spotlight on SDLT avoidance, followed shortly thereafter by advice from the Solicitors Regulatory Authority (SRA) that lawyers should not actively promote these schemes.
However, since the introduction of the 3% SDLT charge on second homes and buy-to-let properties in 2015, we have seen a burgeoning increase in the number of schemes being promoted by professional advisers that aim to reduce or avoid the amount of SDLT payable. We’ve already written extensively about the mixed success HMRC has had in actively cracking down on various tax avoidance schemes but it is fair to say that it has been considerably more successful in closing down SDLT loopholes than other schemes.
Overheated property market
Significant stamp duty changes were introduced by George Osborne in his 2015 Autumn budget in an effort to recalibrate (as considered by some) an over-heated residential market by introducing a more progressive SDLT system giving more people, in theory, the opportunity to clamber onto the property ladder. However, in addition to the 3% surcharge on second homes and buy-to-let, the individual rates in each charge band increased so, for an example, anyone buying a home over £2m would be paying just under 10% more stamp duty than they would have done under the old system. Given the exponential rise in property values, particularly in London and South East, and the increased enthusiasm for investing in the buy-to-let market after the 2008 crash, the adjustment in SDLT meant that people were looking for a loophole to exploit.
Changes to SDLT led to a proliferation of schemes
Although SDLT avoidance schemes have been around for years, the number and type of schemes have proliferated, some of which are particularly aggressive. HMRC’s track record in challenging these schemes in court has been good to date. Some of the schemes being promoted are fiendishly complicated and fairly obscure (Kass, Matterhorn, 3S and Jovian, just to mention a handful); others, such as the ‘husband and wife’, the ‘unlimited company’, the ‘crystal’, the ‘option’, and the ‘partnership to limited company’ schemes are more common. In 2016, the SRA investigated and fined two law firms, Hawkins Ryan and Benson Mazure, for helping their clients avoid SDLT by implementing, among others, some of these more common avoidance schemes in over 300 transactions. Both firms had taken advice from scheme promoter, Inventive Tax Strategies (and the name says everything you need to know about their approach), which went into administration in 2013.
Reputable lawyers repudiate these schemes
Many of these schemes had the backing of counsel’s opinion, confirming the loophole in the legislation. However, scheme promoters often stopped short of disclosing counsel’s opinion in full and where they did so, failed to address the risks of using such a scheme to ‘mitigate’ SDLT. Despite the prevalence of these schemes, most firms stopped encouraging their use following HMRC’s Spotlight 10 and the SRA’s warning to conveyancers in 2012 (following an announcement by the Chancellor that these schemes would be the subject of particular scrutiny). Jennie Newton, our partner specialising in property tax comments: “I have always taken the view that these schemes don’t, in the long run, work. Despite repeated warnings from HMRC, there still seems to be a rump of advisers who determinedly promote these schemes. I would advise anyone seriously considering using one to think twice”.
Can we help?
The old adage, if it’s too good to be true, then it probably is, certainly applies here. There will always be people who are willing to risk using a tax-avoidance scheme and do so with their eyes open – but they are a minority. It is the duty of all professional advisers to provide open, honest advice on all the risks of implementing SDLT avoidance schemes (and, indeed, any tax-avoidance scheme). Anyone who has taken professional advice and entered into one of these schemes in the mistaken belief that they have HMRC’s blessing, may well have the basis of a professional negligence claim against their adviser.
If you have used one of these schemes under investigation, it is important to address your concerns sooner rather than later. We have helped a number of clients negotiate a settlement with HMRC following an enquiry. In addition to helping clients with HMRC determinations and enquiries, we have also been successful in obtaining compensation from parties’ professional advisers.
