Property Taxation — SQE1 FLK2 Property Law and Practice

Your client is buying a house for £500,000. She and her family will move in as their only home. She already owns the house they live in now. It is on the market, no sale agreed, and she will still own it at the end of the day her purchase completes. Does she pay the surcharge for an additional dwelling? Yes. £25,000 on top, because of nothing but the order in which two transactions happen.

She can get all of it back, and this episode tells you when. This is Property Taxation, the last topic in Property Law and Practice, and the one where the answer turns on a date as often as on a rule. Keep her in mind. We are coming back for her twice.

Here is the route. Stamp duty land tax first: the bands, the reliefs, and the surcharge that catches your client. Then leases, and the transactions that are not what they look like. Then Wales and Scotland, because the tax follows the land. Then VAT, where exemption is the default and everything interesting is an exception. Then capital gains tax on the way out.

Start with what SDLT actually is. A self-assessed tax on land transactions in England and Northern Ireland, which replaced the old stamp duty in 2003. Self-assessed means what it says. Nobody sends your client a bill. The buyer works out the tax, delivers a land transaction return, and pays. Both fall due 14 days from completion.

And the return is due even where no tax is payable. A first-time buyer who owes nothing still files, because the relief has to be claimed on the return. No return, no relief.

Now the arithmetic, because it is easy marks. SDLT is charged slice by slice. Only the part of the price falling inside a band is taxed at that band rate. This is not income tax, where one rate can swallow the lot. Take a £300,000 house at the standard residential rates. Nothing on the first £125,000. 2% on the next £125,000, which is £2,500. 5% on the last £50,000, another £2,500. Total, £5,000.

Above those, the slices run at 10% up to £1,500,000 and 12% beyond.

First-time buyers get better numbers. Nothing on the first £300,000, then 5% on the part between £300,001 and £500,000. Above £500,000 the relief is gone. Not tapered. Gone.

Watch what that cliff edge does. Two buyers, neither has ever owned anything, buying together at £600,000. How much relief? None at all. The standard rates apply to the whole price: nothing on the first £125,000, £2,500 in the 2% band, and 5% on the remaining £350,000, which is £17,500. £20,000 in total.

The definition is strict too. You must never have owned a dwelling, here or anywhere abroad, and you must buy the property to live in. On a joint purchase every buyer must qualify, so one buyer who has owned before destroys the relief for both.

Now the charge that catches your client. Buy an additional residential property and a surcharge of 5% is added, raised from 3% on 31 October 2024. Buy-to-lets, second homes, and the case that surprises people most: replacing your main home while you still own the old one.

The test is a snapshot, and the moment is everything. At the end of the day on which the transaction completes, does the buyer hold a major interest in another dwelling worth £40,000 or more? And has the buyer still not replaced a main residence? If both, the surcharge is due. That test sits in Schedule 4ZA to the Finance Act 2003. Past ownership is irrelevant, and so is future intention. What you own when that day ends is the whole question.

And it is not charged on a slice. Five percentage points are added to every band, including the nil-rate band, so in substance it runs from the first pound. Back to your client. On £500,000 the standard residential tax is £15,000. The surcharge adds £25,000. She pays £40,000 where she had budgeted for £15,000.

Then the way out. Where the purchase does replace her only or main residence, the surcharge is repaid on a claim to HMRC, provided the old home sells within 36 months. Sell first and it never leaves her account at all. That is the timing advice, and it has to be given before she commits to a completion date.

Reliefs next, and one large deletion. Relief for multiple dwellings was abolished for transactions completing on or after 1 June 2024, so the tax can no longer be worked out on the average price per dwelling. Buy four flats under one contract for £800,000 and the tax is charged on the whole £800,000 at residential rates, with the surcharge on top. Only a buyer of six or more dwellings can still elect for the non-residential rates.

Try one. A buyer is acquiring a building for £500,000. The ground floor is a shop she will run; above it a self-contained flat she will live in. One contract, one price. Residential rates, because she is living there, or non-residential? Non-residential. A building with both residential and non-residential parts is mixed use, and mixed use is charged at the non-residential rates on the whole price. On £500,000, £14,500.

The commercial bands are short. Nothing to £150,000, 2% from £150,001 to £250,000, 5% above £250,000.

Leases are the awkward one, because a lease can carry two payments. SDLT is charged on any premium at the ordinary rates, and separately on the rent. The rent is not charged on the total payable over the term. It is discounted to its net present value at 5% for each year, so a longer term and a higher rent both raise it.

Then the two are added. A 15-year commercial lease, a premium of £160,000, and a net present value of rent calculated at £350,000. On the premium: 2% on the £10,000 above the £150,000 threshold, so £200. On the rent: 1% on the £200,000 above it, so £2,000. Total, £2,200. Two calculations, one figure.

One more that turns up in questions: the gift that is not a gift. A parent transfers a buy-to-let flat worth £300,000 to their adult child for nothing. The flat carries a mortgage of £200,000 and the child takes it subject to that debt. No cash changes hands, so no SDLT? Wrong. The assumption of existing debt is chargeable consideration, so tax is charged on the £200,000 assumed, which at residential rates is £1,500.

Where the land is decides which tax you are dealing with. Ask it first, not last. England and Northern Ireland: stamp duty land tax, filed with HMRC, 14 days. Wales: land transaction tax, which replaced SDLT there from April 2018. It is administered by the Welsh Revenue Authority, not HMRC, and the return and the payment are due within 30 days.

The Welsh rates differ as well. The main residential bands begin at £225,000, and there is no first-time buyer relief in Wales at all. An English solicitor who files a Welsh purchase with HMRC inside a fortnight has both halves wrong.

Scotland is the third system: land and buildings transaction tax, from April 2015, administered by Revenue Scotland. Its additional dwelling supplement is 8%, raised from 6% for contracts from 5 December 2024, and it is charged on the whole price rather than added to each band. On a £250,000 second home that is £20,000.

VAT now. A supply of property can be standard-rated at 20%, zero-rated, or exempt. Zero-rated and exempt both mean the buyer pays nothing, and they are not the same thing. The difference is input tax. A supplier making standard-rated or zero-rated supplies recovers the VAT on its own costs. A supplier making exempt supplies cannot. Same charge to the customer, opposite consequence for the seller.

So work the categories. A new residential building is zero-rated. That means the first grant of a major interest, a freehold sale or a lease of more than 21 years, by the person who built it. A developer selling new flats on 999 year leases charges its buyers nothing and still recovers the VAT on materials and fees. That is why development is structured to land inside zero-rating. An existing residential building is exempt.

Commercial property is exempt too, by default. Now a trap. A developer is selling the freehold of an office block it completed eighteen months ago, and it has never opted to tax. The buyer has budgeted for no VAT, because commercial property is exempt. Right or wrong? Wrong. The sale of a commercial building within three years of its completion is compulsorily standard-rated. 20% on the price, option or no option.

Which brings us to the option to tax, the first thing to check on any commercial purchase. The default is exemption. A landlord can elect out of it, notify HMRC in writing, and charge VAT from then on, on the rent and on a sale. The option normally takes effect 60 days after notification.

Why volunteer to charge tax? Because exemption blocks input tax recovery. Opting lets the landlord recover the VAT on the purchase, the refurbishment and the maintenance. The price is that every tenant pays 20% on the rent.

Whether that hurts depends on the tenant. A haulier making only taxable supplies pays £60,000 on a £50,000 rent and recovers the £10,000. An insurance broker making mostly exempt supplies is partially exempt, and gets back only an apportioned share.

Once made, the option is close to permanent. It applies indefinitely and can be revoked only after 20 years. Hardship to the tenant is not a ground.

One more VAT rule, because business sales run through property. Where a business is transferred as a going concern, the transfer counts as neither a supply of goods nor a supply of services. No VAT on any part of the price, premises included. The buyer must be registered, must carry on the same business, and there must be no break in trading. Where the property has been opted, the option passes to the buyer, who notifies HMRC within 30 days.

Capital gains tax, on the way out. It bites on a gain made on anything that is not your main residence. The computation is a list of allowable deductions, and that is where the marks sit.

A landlord is selling a buy-to-let house for £400,000, having bought it for £250,000. On the purchase he paid £2,500 of SDLT and £1,500 of legal fees. On the sale he will pay £6,000 of agent and legal fees. During his ownership he spent £30,000 on a permanent extension, £8,000 on redecoration and repairs, and £20,000 on mortgage interest. What comes off?

The acquisition cost, £250,000. The incidental costs of acquisition, £4,000. Capital enhancement reflected in the asset, so the £30,000 extension. And the incidental costs of disposal, £6,000. That is £290,000, leaving a gain of £110,000. Redecoration and repairs are revenue, not capital. Mortgage interest is a cost of financing. Neither comes off, and both will be offered to you as answers.

Then the rates. On residential property, 18% for a basic rate taxpayer and 24% for a higher rate taxpayer. Since 30 October 2024 the rates on everything else match those, so a warehouse and a buy-to-let are taxed alike. Last, deduct the annual exempt amount: £3,000, per person.

Private residence relief keeps most people out of the charge altogether. A gain on your only or main home is exempt. But it is apportioned across the period of ownership, by reference to the periods in which it actually was your main residence.

So: bought a house, lived in it five years, moved in with a partner, let it for the next five, sold after ten. How much of the gain is relieved? Not half. The final nine months count as occupation whether you were living there or not. Five years and nine months out of ten. 57.5%, and the balance is chargeable.

That final period is nine months for most people, and 36 months for a disabled person or a long-term resident of a care home. Letting relief will not rescue the rest: since April 2020 it applies only where you shared occupation with your tenant.

Two planning points. A client with more than one residence can nominate which is the main one. The nomination must be made within 2 years of the date the combination of residences changes. Not two years from the first purchase. From the change.

And transfers between spouses or civil partners living together are made on a no gain, no loss basis, under the Taxation of Chargeable Gains Act 1992. Transfer a half share to a basic rate spouse before the sale and the gain is split between two people.

Last, the deadline that trips people. A gain on United Kingdom residential property is reported on a standalone return, and the tax paid on account, within 60 days of completion. Not on the January return.

A word on how SQE1 tests this. There are no cases in this topic. Not one. And from the January 2027 sitting, monetary values are provided. Where a question requires you to apply a rate, a threshold or a relief, that figure is given to you in the question itself. That is the September 2026 assessment specification.

So do not spend your revision memorising bands. Learn the method. If you keep only three things, keep these. Where the land is, because that fixes both the tax and the deadline. What the buyer owns at the end of completion day. And whether a supply is exempt or zero-rated, because only one of them lets the seller recover input tax.

Five traps. One: the return, not the tax, drives the deadline. A land transaction return is due within 14 days even where nothing is payable, and a relief that is not claimed on the return is not claimed at all.

Two: three taxes, three deadlines. 14 days in England and Northern Ireland, 30 days in Wales, 60 days to report a residential gain. The paper will offer you all three in one set of answers.

Three: always check whether a commercial property has been opted to tax. Buy an opted building and you inherit the obligation to charge VAT on the rent. A landlord who has opted must account for that tax whether or not it collects it.

Four: advise on the order of the sale and the purchase before the client is committed to dates. Complete the purchase first and the surcharge falls due on the day, recoverable or not. Five: the 60 day reporting deadline does not wait for self-assessment. Late returns start at £100 for up to 3 months.

Quick check. A man completes the purchase of a house in England on 16 November 2026, at £400,000. He is not a first-time buyer and will own nothing else. He tells you three things. His last house was in Wales, where the return went in a month after completion. He sold a rental flat this year and had 60 days to report the gain. And he files his own tax return each January.

By what date must the land transaction return be filed and the tax paid? Three candidate answers. One: within 14 days of completion, so by 30 November 2026. Two: within 30 days of completion, so by 16 December 2026. Three: within 60 days of completion, so by 15 January 2027. Pause here if you want a moment.

The answer is one. A land transaction return must be delivered, and the tax paid, within 14 days after the effective date of the transaction. On an ordinary purchase that is the date of completion. Completion on 16 November 2026 gives 30 November 2026 as the last day, and interest and penalties run from it.

Why the others fail. 30 days is the Welsh deadline, which is why his last purchase is no guide to this one. 60 days is for reporting a gain on United Kingdom residential property, not for a purchase. And SDLT is not returned through self-assessment at all, so January is nothing to the point.

Five things to take away. One: identify the jurisdiction first. Stamp duty land tax and 14 days in England and Northern Ireland, land transaction tax and 30 days in Wales, land and buildings transaction tax in Scotland. Two: the surcharge turns on what the buyer owns at the end of completion day.

Three: in VAT, exemption is the default, and the real question is always input tax recovery, which is why exempt and zero-rated are not the same answer. Four: private residence relief is apportioned, with the final nine months counted as occupation. Five: a residential gain is reported and paid within 60 days.

And your client. She completes before the old house sells, pays £40,000 instead of £15,000, and claims £25,000 back once that house is sold within 36 months. Private residence relief then covers the gain on it. Timing, all the way through. Next time, a new subject: Trusts Law.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.