Over the couple of years, many will have seen agents offering to sell your home for £200 plus VAT. They do this by employing what they erroneously term ‘Sale By Tender’. This method of sale has been used by agents for many years and is properly named ‘Sales by Informal Tender’. Simply, where some properties which are difficult to value, have ‘potential’ or which generate masses of interest, buyers are asked to put forward their best offer as a ‘sealed bid’ and the highest or best placed to purchase is successful.
Some agents have hijacked this term and offer the property for sale by this method, but with one important twist. They charge the seller a small ‘administration fee’ and the buyer has to pay the commission, often at a rate higher than they would otherwise get from a seller. Of course, by this stage, the buyer loves the property and will often agree to pay this fee which saves the seller money. That said, many buyers will factor this cost into their offer, however the agent will have secured an instruction that might otherwise have go to a competitor.
However, HMRC have now questioned this practice as the payment could be seen as part of the transaction and eligible for Stamp Duty Land Tax.(SDLT)
If HMRC’s view as expressed in a very recent letter proves to be policy, it could have huge implications for purchasers paying agents in ‘Sale by Tender’ deals. This of particular concern at the SDLT tax thresholds.
For example, a sale may complete at £249,000, but adding in the buyer’s 2% fee would push the price over the first SDLTy threshold, meaning that the purchaser is hit with an unexpected bill. If HMRC is correct the effect would look like this – 2% of £249,000 is £4,980 which would make the total paid by the purchaser £253,980. If HMRC insists that is the total transaction value paid by the purchaser for the property, that would mean the buyer would have to pay 3% Stamp Duty Land Tax, which is £7,619.40.
Agents who have gone into the For Sale by Tender sector generally advise that the fee is not part of the purchase price. PropertyLaw.Guru run by the excellent Hannah Mackinlay disagrees. On Property Industry Eye she warns: “This is SDLT (its NOT the same as ‘Stamp Duty’, and hasn’t been for over 10 years) and it is chargeable on any consideration paid in connection with the transaction, whatever you call it, a fee or otherwise, whether it is in the contract or transfer or in a brown paper bag in cash, and whether it is paid before or after the transaction. It doesn’t matter how you structure it, payment before or after, if it is part of the ‘deal’ it is consideration and the tax payer and the solicitor are party to tax fraud if they don’t include it in the consideration.”
Eric Walker, Northwood MD agrees. He notes that the fee charged to the buyer is not in return for any service nor is the process to buy different from the usual arrangement where the vendor pays the agents commission. Simply it is a lure to make the agent look more competitive and secure more instructions.
HMRC has stated in a recent letter ” Whether an introduction fee or any other fee is chargeable consideration depends on whether it is given for the land transaction or for another matter. If under the terms of a contract the purchaser has an obligation to give the purchase price plus a fee in order to acquire the property, in these circumstances the fee is given for the property and total amount is chargeable consideration for the land transaction. Where the transfer of the property is not dependent on the payment of the fee then it is not treated as chargeable considerable because it is not given for the land transaction. I note that the copy of an email received from XXXXXX Estate Agents states that “99% do pay in order to secure the property”. It goes on to say if the buyer is not willing to pay, the vendor may revert to selling the property by a private treaty sale. If this means that the vendor would not sell the property unless the purchaser agreed to pay the introduction fee, in my opinion the transfer of the property is dependent on the payment of the fee.
Not only do HMRC have powers to revisit past transactions, penalties can be severe if this is seen as deliberate tax evasion. Solicitors may also suffer the Governments wrath if they have not issued proper advice or completed the tax returns fully.
If you are a buyer and have been asked to pay the agents fee, you should seek expert legal advice or call HMRC before signing any contract with an agent.