Mark McLaughlin highlights possible stamp duty land tax pitfall and planning points when buying a residential property together with some or all of its contents.
For property buyers, stamp duty land tax (SDLT) can represent a significant additional cost. At present, for residential properties SDLT at 1% generally becomes payable if the property costs more than £125,000 but not more than £250,000. The SDLT rate then increases to 3% if the property costs more than £250,000 but not more than £500,000, and increases in further stages up to 7% if the property costs more than £2 million (or even 15%, for residential property bought by certain ‘non-natural persons, including companies).
There is a ‘cliff-edge’ effect with SDLT. For example, a residential property costing £250,000 is subject to SDLT at 1%, i.e. £2,500. However, if the property costs £250,001, the buyer has gone over the cliff-edge into an SDLT rate of 3%, i.e. £7,500.
Everything must go?
Some property sellers may not wish to take the house contents with them, or at least not all the contents. It can also be an attractive proposition for a property buyer to acquire a fully or partially equipped house, such as where the property is to be rented out. The purchase price for the property may therefore include an amount for its contents. This may give rise to a potential SDLT saving opportunity…and also possible pitfalls.
The SDLT legislation broadly states that if a payment relates partly to a property and partly to something else, the payment must be apportioned between them on a ‘just and reasonable basis’ (FA 2003, Sch 4, para 4(1)).
For example, fixtures and fittings which are physically attached to a property are treated as part of the land, so SDLT is payable on them. On the other hand, ‘chattels’ (or ‘moveables’ in Scotland) which are not attached to the property are not treated as part of the land, so no SDLT is payable on them.
HM Revenue & Customs (HMRC) generally regards the following items as ‘chattels’ in a residential property (see HMRC’s SDLT manual: www.hmrc.gov.uk/manuals/sdltmanual/SDLTM04010.htm):
• carpets (fitted or otherwise);
• curtains and blinds;
• free standing furniture;
• kitchen white goods;
• electric and gas fires (provided that they can be removed by disconnection from the power supply without causing damage to the property); and
• light shades and fittings (unless recessed).
On the other hand, items which HMRC does not normally regard as chattels include fitted kitchen units, cupboards and sinks, wall mounted ovens, central heating systems and intruder alarm systems.
The ‘just and reasonable’ pitfall
It would be tempting to reduce the SDLT liability on a property purchase by allocating a generous proportion of the purchase price to chattels. However, even if the buyer and seller agree a particular allocation in the contract for the property, HMRC may seek to adjust the allocation upon a subsequent enquiry into the SDLT return, unless it was made on a just and reasonable basis.
Acquiring the property and the fixtures under separate contracts does not get around this ‘just and reasonable’ requirement. The SDLT rules broadly provide that if, in substance, the contracts are effectively a single ‘bargain’, the purchase price will be apportioned over each of the transactions (FA 2003, Sch 4, para 4(3)).
The ‘fixture’ pitfall
In Orsman v Revenue & Customs  UKFTT 227 (TC)*, the appellant bought a house together with some chattels for £258,000, of which £8,000 was allocated to chattels. HMRC enquired into the land transaction return, and concluded that built-in fitted units in the garage valued at £800 were ‘fixed’ items, as opposed to chattels. The purchase price in respect of the property was therefore adjusted to £250,800. This increased the SDLT rate from 1% to 3%. The SDLT liability therefore also increased, from £2,500 to £7,524.
The contract of sale specified a purchase price of £250,000 and a ‘chattels price’ of £8,000. A list of items was attached to the contract. Some of those items were clearly not part of the land (e.g. a fridge and washing machine), but the list included other items which might be considered part of it. One of those items was “Built-in fitted units with worktop £800” in the garage. Following an enquiry into the SDLT return, HMRC concluded that all the items on the list were chattels with the exception of the fitted units with worktop, which were considered to be a fixture and so part of the land.
The First-tier tribunal held that there had been a single transaction, which was partly for land and partly for items which were not land. The garage worktop and units were ‘land’ as opposed to ‘chattels’. interestingly, the tribunal considered that other items on the list were also part of the land, rather than chattels, i.e. an ‘up and over’ garage door motor, ‘eyeball’ down lights, spotlights, the front doorbell system and shrubs in the garden. However, based on the assumption that the only item on the list which was not a chattel and was part of the land was the garage worktop and units, the tribunal concluded that it would be ‘just and reasonable’ to apportion £250,800 of the consideration paid to the property and the garage worktop and units, and the rest to chattels. The appeal against the increased SDLT charge was therefore dismissed.
When buying a residential property with its contents, make sure that a ‘just and reasonable’ valuation is attributed to any ‘chattels’ (e.g. carpets, curtains, fridges), particularly where the total purchase price is close to one of the SDLT rate thresholds. But be careful to distinguish between ‘chattels’ (which are not liable to SDLT) and ‘fixtures’ (on which SDLT is payable as part of the land).
*The full case transcript of Orsman v Revenue & Customs  UKFTT 227 (TC) is available on the British and Irish Legal Information Institute website: www.bailii.org/uk/cases/UKFTT/TC/2012/TC01921.html