Unwinding property contracts: tax for the unwary

It is rare, but not unheard of, for a property dispute to result in the rescission of the relevant contract. But what is the SDLT position? Does the "purchaser" get a refund of the tax it has paid? And what happens when the title to the property is transferred back to the original owner?

The SDLT rules offer partial assistance in this situation. A purchaser who is party to a contract which is substantially performed (albeit not completed) but afterwards rescinded may claim a refund from HMRC. However, there is no such assistance in statute for those whose contracts have been completed.

A purchaser may try to make a claim for overpayment relief from SDLT, although this is a general process and there is no guidance to indicate how such a claim might be viewed by HMRC. 

It is also worth stepping back to unpick what actually has happened. The term "rescission" is commonly used in circumstances which go beyond its strict meaning, i.e. a remedy exercisable by a party to a contract where that contract is rendered voidable by virtue of a misrepresentation made by the other party. The word is often used to refer to contracts which have been terminated as a result of a breach by a party, and it is not unusual for there to be contractual provision whereby a property may be returned to the seller, who is then required to return the consideration received. The Standard Commercial Property Conditions also limit the availability for rescission for pre-contract representations.

The method of unwinding is more than just a means to an end here - it is likely to change the SDLT outcome too. 

Where a purchaser has exercised its equitable remedy to rescind a contract, as a matter of law the obligations which were created by the contract are annulled. It is to be as if there had been no contract. This may go far enough to establish that the purchaser holds the property on constructive trust for the vendor, such that the return of the property and the original purchase price can be ignored for SDLT purposes. By contrast, where these transfers are effected pursuant to contractual provisions, it is more difficult to argue that there is no land transaction on which SDLT is chargeable. 

Relying on provisions put in the contract to give the parties certainty may therefore have an unwanted tax consequence.