After the avoidance scheme fails in court, the family faces a 100k stamp duty bill and pounds; these are the mistakes to avoid

A couple tries to lower their stamp duty bill, but they end up with a sizable bill

Following the rejection of their appeal against the bill, a couple now faces paying 100,000 in stamp duty. The Mudans will now be required to pay the six-figure amount, despite their attempts to lower their liabilities through a tax avoidance scheme.

According to accountants, the recent ruling has brought attention to the dangers of participating in schemes to evade stamp duty land tax (SDLT).

Certain arrangements have been promoted for years as a way to drastically lower or even eliminate SDLT liabilities on real estate purchases, which is a major expense associated with moving.

HMRC has consistently rejected such schemes, and their stance is supported by the Court of Appeal's ruling in the Mudans case.

What was the plan for avoiding stamp duty?

In order to turn it into a family home, Mr. and Mrs. Mudan bought a badly dilapidated house in London. The property was occupied at the time of purchase, and they obtained it using a residential mortgage.

After purchasing, the couple completed renovations to the house, including rewiring, installing a new boiler, replacing windows, tanking the basement, and other features.

After paying stamp duty at residential rates, the Mudans changed their stamp duty return to request a refund, arguing that the property was non-residential at the time of purchase and unfit for human habitation.

A lower stamp duty rate is applied when a property is deemed unfit for residential use and cannot be used as a place of residence. For a property worth more than £250,000 in the 2024 - 2025 tax year, this is a maximum of 5%.

Those who buy second properties would save even more because they would not be subject to the usual 5% stamp duty increase on buy-to-let properties.

By using a fictitious sub-sale arrangement, the couple in the Mudan case tried to evade SDLT.

In an attempt to take advantage of a tax break that was never meant for such transactions, they agreed to a number of procedures that were intended to make it appear on paper that the couple was purchasing something other than a finished residential property.

The buyer had bought a residential property, and stamp duty was fully applicable, according to the Court of Appeal, which also determined that this was the legal and business reality. HMRC was successful in arguing that the relevant relief could not be claimed and that the fabricated steps had no legitimate commercial purpose.

Bento stated: "A lot of people argue that they have been duped by advisors who portray these schemes as tried-and-true or HMRC-approved claims that aren't true.

Even though the majority of professional advisors behave responsibly, there have been instances where advice was provided by people lacking the requisite level of tax expertise or without a complete disclosure of the risks.

What errors are people committing when using stamp duty avoidance schemes?

According to Bento, her company has been contacted by people and companies who joined stamp duty avoidance schemes, either when they were buying a property or years later after being contacted by scheme promoters.

According to her, these promoters frequently imply that homeowners can retroactively claim overpayment relief for SDLT by stating that the property was unusable at the time of purchase.

According to Bento, "one major error is assuming that a scheme must be safe just because it has been used before or because it was promoted by a seemingly reliable source."

Using viewpoints that are not genuinely independent but rather created by people who have a stake in selling the arrangement is another.

"Regarding the scheme itself, one of the key misunderstandings is the belief that one can re-characterise a straightforward property purchase into something outside the scope of SDLT," Bento added.

The Bentos firm frequently observes a pattern, which is reflected in the Mudan case.

Form is overused at the expense of content. In addition to the documentation, courts and HMRC consider the actual events. legislative misinterpretation. Reliefs are precisely defined; attempting to extend them beyond their intended parameters nearly always results in failure. disregarding previous decisions. Although similar schemes have been foiled in the past, promoters occasionally ignore those setbacks. "If a scheme relies on artificial steps without a legitimate commercial reason, it is unlikely to survive HMRC challenge," Bento stated, citing the Mudan decision as support.

How to proceed if you have employed a stamp duty avoidance plan.

HMRC's position on stamp duty avoidance has been steady in theory but has grown stronger in reality. Bento stated that HMRC now believes that 95 percent of stamp duty reclaims are incorrect, which will result in more aggressive litigation, a quicker response, and a broader use of information-gathering powers.

Finding tax-related information has never been simpler thanks to the internet and artificial intelligence (AI), but even seemingly "clever" online arrangements can result in expensive disputes with HMRC.

Penalties may be imposed if HMRC finds that the tax was underpaid. Bento stated that HMRC will not accept justifications like "I read it online" or "an AI tool told me" as justifications for evading fines or reversing evaluations.

Inaccurate claims or SDLT returns may be eligible for a reduction in penalties, contingent on the particular circumstances and whether HMRC has initiated an investigation.

Bento stated, "There are serious risks involved in trying to handle your own tax affairs or engage in tax planning without expert advice." We strongly advise obtaining professional advice as soon as possible if you have doubts about the accuracy of prior tax returns or advice as proactive involvement can have a big impact.

It should be a reminder that if something seems too good to be true, it usually is, as demonstrated by the Mudan case. It is always safest to make sure that your tax affairs are transparent, compliant, and founded on good professional advice.