Tax partner, Stephen Goldstraw, looks at the small print on the new SDLT rate changes and discovers that anyone contemplating the purchase of a big house in the country would be well advised to make sure it comes with a field.

The extra 3% SDLT on the purchase of additional residences is now in force even though the legislation itself is still going through Parliament. But HMRC has helpfully issued a detailed guidance note on the new legislation and the application of the new rate.

  • The extra 3% charge does not apply to leases originally granted for a period of seven years or less. However, it does apply to leases originally granted for longer periods which now have seven years or less left to run.
  • The charge does not apply to the sale of a garden or grounds of a house unless the house is also being sold.
  • The charge does not apply to purchases of non-residential properties or properties used for both residential and non-residential purposes. Although this sounds innocuous, it is anything but. It means that purchases of the most expensive properties in the country (outside of London anyway) will generally attract an overall SDLT rate of less than 5%.

This is because most of them will include something such as a field which will turn the property into a mixed-use property. (But note that purchases of such properties by a company might attract the penal 15% SDLT rate.)

  • The charge does not apply if the price is below £40,000. This test is based on the total price for the property. For instance, the extra 3% rate would apply to joint purchasers buying a property for £50,000.
  • The charge does not apply if the interest acquired is subject to a lease which has more than 21 years to run on the date of purchase.
  • In general, the extra 3% only applies to the purchase of a second (or further) residence - although, for companies, it also applies to their first purchase. For the charge to apply, the second residence must have a market value of more than £40,000 and not be subject to a lease which has more than 21 years to run.

For this purpose, one is only valuing the interest of a joint owner, ie if joint purchasers already own a property worth £50,000, that would not trigger the 3% charge since each co-owner’s interest is worth less than £40,000.

  • There is a relief for replacing one’s main residence. The 18 month period mooted at the time of the consultation has been replaced with a more generous three years. That is, the relief is available if the new property is bought within three years of the old property being sold. If the old property is only sold after the new property is bought, the purchaser must initially pay the extra 3%, but can reclaim it provided the old property is sold within three years of the purchase of the new property.
  • Whether a property is a main residence or is intended to be a main residence in the future is a question of fact. Renting a new main residence in the time between disposal and purchase will not prevent the purchase from being a replacement of a main residence unless the period of the tenancy agreed is more than seven years.
  • The following factors are thought by HMRC to be relevant in determining whether a residence is a “main residence” of an individual:
    • If the individual is married or in a civil partnership, where does the family spend its time?
    • If the individual has children, where do they go to school?
    • At which residence is the individual registered to vote?
    • Where is the individual’s place of work?
    • How is each residence furnished?
    • Which address is used for correspondence?
    • Where is the individual registered with a doctor / dentist?
    • At which address is the individual’s car registered and insured?
    • Which address is the main residence for council tax?
  • If two or more residences are bought in the same transaction then the extra 3% rate will generally apply even if one of the residences is replacing a main residence. However, if a residence is bought together with a commercial property in the same transaction, both purchases will be treated as "mixed use", and liable to SDLT at a top rate of 5% (see bullet three above).
  • If six or more residences are bought in the same transaction, all of them will be treated as commercial properties, meaning that they will be liable to SDLT at a top rate of 5%.
  • With joint purchasers, the higher rate will generally apply if any of them already owns a residential property, no matter how small their interest in the jointly owned property.
  • Trusts will generally have to pay the higher rate on all purchases of residential property, although bare trusts and life interest trusts may not have to if the beneficial owner or life tenant would not pay it if they purchased the property themselves.
  • Charities benefiting from SDLT charitable relief will not have to pay the 3%.