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Have you ever wondered how a smart property plan can unexpectedly turn into a huge tax bill? This amazing case shows exactly what can happen when you don’t review every little detail in a land transaction.
Mr Ali and his family had lived at 94 Mayfair Avenue for over ten years. But when they needed a bigger home, Mr. Ali decided to sell his current property and buy a new one. Like many property deals, his plan involved a chain of transactions where contracts were supposed to be exchanged on the same day. However, at the last minute, the seller of his new home pulled out, and the entire chain collapsed.
To avoid losing time again, Mr. Ali’s mortgage adviser came up with a creative idea. He suggested that instead of selling his home immediately, Mr Ali should transfer it to a company and then use that company to borrow money for the new purchase. Acting on this advice, Mr Ali set up Mayfair Avenue Limited (MAL) on 16 April 2021. On 30 June 2021, MAL bought the house for £650,000 and filed a Stamp Duty Land Tax (SDLT) return, paying an initial tax of £27,000.
In February 2022, Mr Ali managed to buy a new property. However, he didn’t move in until 13 May 2022 because the new house needed some work. During this period, his family continued to live at 94 Mayfair Avenue and paid rent to MAL.
But here’s where the twist comes in. In March 2022, HMRC started looking into MAL’s SDLT return. After some back and forth, HMRC issued a closure notice in May 2022, stating that there was an extra SDLT liability of £70,500. Mr Ali tried to appeal, and although his appeal was late, HMRC accepted it for review. However, after an internal review, HMRC stood by the extra charge, so Mr Ali took his case to the First-tier Tribunal (FTT).
The legal issue centred on a special rule in the tax law. Under FA 2003, Schedule 4A, if a single dwelling is bought for more than £500,000, it is considered a “higher threshold interest” and is treated as a high-value residential transaction. This means that when a company buys a property, the SDLT rate jumps to 15% of the chargeable amount.
There’s an important exception: if the property is acquired only to let it out (to earn rental income), the higher rate might not apply. But there’s a catch. The law states that if the property is intended to be occupied by a “non-qualifying individual” (someone connected to the purchaser), then the special lower rate does not apply. In Mr Ali’s case, as the sole director and shareholder of MAL, he was considered a connected person. Even though he rented the property to himself and his family, this made him a non-qualifying individual, triggering the higher 15% rate.
Mr Ali argued that neither he nor his adviser knew about this extra tax and that he never made any profit from the arrangement because he paid full market rent. But HMRC’s rules are clear: if you plan to live in the property and you’re connected to the company that bought it, the higher SDLT rate applies. The tribunal agreed with HMRC and dismissed Mr Ali’s appeal.
This case, Mayfair Avenue Ltd [2024] UKFTT 430 (TC), powerfully reminds us always to check every detail in a property deal. Even well-planned transactions can hide costly surprises, so expert advice in complicated cases is essential. Stay smart and double-check those details—one small oversight can lead to an unbelievable tax bill!