What constitutes “possession” and its importance (and relevance) for correctly calculating your SDLT liability
What is the risk to a purchaser (for example a buyer under a sale contract or a tenant under an agreement for lease), if they enter the property before completion to carry out works? The First-Tier Tribunal (FTT) has recently looked at the meaning of “possession” (and its significance for SDLT purposes) in the recent Goldsmith decision (Goldsmith Ltd and another v HMRC).
Relevance of possession – substantial performance
SDLT is generally payable on completion of a land transaction, though there is a potential trap for the unwary if there is a gap between exchange and completion. The payment of SDLT (and the requirement to file an SDLT return) can (often unexpectedly) be accelerated where a contract is “substantially performed” prior to its completion.
Contracts are “substantially performed” upon the earlier of the purchaser: 1) taking possession of the whole (or substantially the whole) of the property; 2) paying a substantial amount of the consideration (generally accepted to be 90%); or 3) making the first payment of rent. It is often difficult to determine if, and when, a purchaser has taken possession, and this was considered by the FTT.
A common example is where a purchaser enters a commercial site to carry out fit-out works. Perhaps surprisingly, in Goldsmith the FTT held that a purchaser did not take possession despite carrying out substantial works pre-completion.
The Goldsmith decision also considered the purchaser’s entitlement to multiple dwellings relief (now abolished with effect from 1 June 2024), however this element of the decision is not considered in this note.
The Goldsmith decision – the facts
The purchaser contracted to buy a house with the intention of converting it into three self-contained flats. The parties agreed that the purchaser could have early access between exchange and completion to carry out the conversion works, subject to several conditions, including that:
- structural works were not permitted;
- working hours were to be limited;
- the purchaser would have to return the keys to the property at the end of each day; and
- the seller remained responsible for insuring the property, and the property’s security and utilities (though the purchaser was required to reimburse the cost of utilities used).
A key question was whether the early access resulted in the purchaser taking “possession”, such that the contract had been substantially performed.
Meaning of “possession”
The FTT noted that:
- possession is wider for SDLT purposes than for property law purposes (possession for SDLT purposes can also arise under a licence or a lease of a temporary character, but this is not sufficient for property law purposes);
- not every licence confers a right to “possession” for SDLT purposes;
- “possession” for SDLT purposes requires the purchaser to go into occupation of the property as if the purchaser had become the owner (generally understood to be “taking the keys” to the property); and
- occupation must be lawful (i.e. it cannot be trespass); this is ascertained at the point of entry (and not later, if any conditions of occupation are subsequently not met).
The Outcome
Despite the works undertaken being significant in nature (and beyond what had been contractually permitted), the FTT held that possession had not been taken for SDLT purposes; the purchaser did not have the freedom to occupy the property “as owner”, i.e. as the purchaser wished, and the purchaser did not have responsibility for the property and liability for the outgoings.
The agreed scope of the permitted works (ignoring the actual works undertaken) was considered by the FTT to be a “neutral factor”. However, the FTT was clear that the cosmetic nature of those works and the express prohibition of structural works generally pointed in the direction of the seller not having granted permission for the purchaser to take possession.
Unfortunately for the purchaser, despite the FTT holding that the contract had not been substantially performed, the FTT held that he remained liable to pay the full SDLT due. The individual purchaser had assigned the contract to his own company, and this constituted a notional land transaction for which an SDLT return was required. The purchaser had failed to submit this SDLT return and claim sub-sale relief (to which he would otherwise have been entitled). Despite the assignee company having paid SDLT on the purchase, the individual purchaser was also liable to SDLT, and so the purchaser was effectively taxed on the same transaction twice.
Key takeaways
The decision is a reminder of the importance of taking SDLT advice early – the question of whether possession has been taken is not straightforward to determine, is important to get right, and needs to be determined on a case-by-case basis.
The FTT appeared to put significant emphasis on the contractual restrictions governing the purchaser’s access to the property as indicative that permission for the purchaser to take possession had not been given. It was clear as a factual matter that a number of those contractual restrictions were actually enforced and were not merely “window dressing”. For taxpayers looking to avoid inadvertently triggering substantial performance (including where substantial works are proposed to be undertaken), it is unlikely that including such contractual restrictions will in and of itself prevent substantial performance. It remains the case that a court is very likely to consider substance over form and whether those restrictions were intended to be (and have as a matter of fact been) enforced.
The question of when (and not whether) possession is taken can also prove challenging. The decision underlines the importance of retaining evidence of when access is taken to a property – establishing this key date is also crucial to correctly determine the SDLT liability.
A full link to the judgement can be found, here.
