Introduction

In the Autumn Statement 2015 the chancellor announced an increase in the rate of stamp duty land tax that will be paid from April 1 2016 on purchases of additional residential properties in England, Wales and Northern Ireland valued over £40,000 (for further details please see "Autumn Statement 2015: proposed stamp duty land tax changes"). This will include buy-to-let properties and second homes.

Purchasers of such properties will pay an additional 3% stamp duty land tax above the rates that they would have paid under the existing rules. With the current top rate of stamp duty land tax for individuals acquiring residential property at 12%, this will result in purchasers paying rates of up to 15% on affected properties when the new rules take effect. Her Majesty's Revenue and Customs (HMRC) has confirmed that where companies and other non-natural persons are already liable to pay higher-rate stamp duty land tax at 15% on residential property purchased, the additional 3% rate will not be payable.

Purchasers of property in Scotland no longer pay stamp duty land tax following the introduction of Scotland's land and buildings transaction tax on April 1 2015. However, the Scottish government is proposing to mirror the chancellor's additional 3% rate for acquisitions of residential property in Scotland.

Her Majesty's Treasury published its promised consultation on the stamp duty land tax policy detail on December 28 2015. This update highlights the main proposals for the new charge detailed in the consultation.

It is clear from several of the consultation questions that the government is still at an early stage in its thinking in relation to a number of the measures; as such, the final rules may look significantly different from the initial proposals.

Principal proposals

The additional 3% rate of stamp duty land tax will not apply to property acquisitions where contracts were exchanged on or before November 25 2015 (the date of the Autumn Statement 2015), even if the transaction is completed on or after April 1 2016.

The additional rate will apply to relevant transactions where contracts were exchanged after November 25 2015 if the transaction is completed on or after April 1 2016.

The additional rate will apply only to purchases of additional properties. Individuals or couples buying their first home or replacing one main residence with another (even if one or both of them also own one or more additional properties) will not be affected.

Equally, individuals or couples purchasing a property which they intend to let out – or which will be a holiday home, for example – will not be caught by the additional rate, provided that it is the only property that they own at the end of the date of the transaction (eg, someone living in rented accommodation who purchases a buy-to-let property or holiday home, or who sells such a property and replaces it with another on the same day, will not be liable to the additional rate).

The government produced a useful flowchart, based on its current proposals, to assist with determining whether the additional rate applies, as can be viewed here.

It will not be possible to elect for property to be treated as a main residence. That will be a question of fact, taking into account a number of factors:

  • Foreign property owned by a person acquiring residential property in England, Wales or Northern Ireland will be taken into account in determining whether the additional rate of stamp duty land tax is payable on that acquisition.
  • Married couples and civil partners will be treated as a single unit for the purposes of determining whether the additional rate is due on an acquisition of residential property.
  • Acquisitions of residential property by trusts and settlements will be treated as follows:
    • An acquisition by bare trustees will be treated as a purchase by the underlying beneficiary directly.
    • For the purposes of determining whether the additional stamp duty land tax rate is due, an acquisition of residential property made by the trustees of a settlement for beneficiaries with life interests or interests in possession will be treated as if it were made by the individual beneficiaries themselves.
    • The additional rate of stamp duty land tax will be due on any acquisition of residential property over £40,000 by the trustees of other trusts (eg, discretionary).
  • Companies and collective investment schemes will be liable to the additional rate of stamp duty land tax on all acquisitions of residential property over £40,000 (even a first acquisition), subject to any available relief.
  • The following exclusions and reliefs will apply:
    • Acquisitions of non-residential property and mixed-use transactions (ie, where residential and non-residential properties are purchased together in a single transaction and treated as non-residential transactions for stamp duty land tax purposes) will not be liable to the additional rate.
    • Where multiple dwellings are purchased in a single or linked transaction, this transaction is eligible for multiple dwellings relief where stamp duty land tax is calculated according to the average value of the properties, rather than the total value of the transaction. The rate due will be calculated including the additional rate of stamp duty land tax where relevant.
    • With regard to large-scale investors, the consultation proposes that bulk acquisitions of at least 15 residential properties in one transaction should not be liable to the additional rate. This relief may be available to both individuals and corporate purchasers. Alternative options for exemption are being considered.

Main residence determination

It will not be possible to elect for property to be treated as a main residence. This is intended to be a question of fact. Factors which HMRC will consider in determining this include:

  • the correspondence and registration addresses given to various organisations;
  • the location and degree of furnishing and location of moveable possessions;
  • where the individual works;
  • at which residence the individual is registered to vote;
  • if the individual has children, where they attend school; and
  • where the individual and his or her family spend their time.

The government is proposing the following two-stage test to determine whether a purchase of a residential property constitutes a replacement of a main residence:

  • whether, at the time of the transaction, a property sold in the past 18 months was the only or main residence of the individual; and
  • whether the purchaser of the new property intends to occupy that property as his or her only or main residence.

Where an individual owns more than one residence, determining which of these is his or her main residence will be a question of fact, based on the factors above.

Foreign property

The government intends that owners of another residential property outside England, Wales or Northern Ireland also be liable to the additional rate of stamp duty land tax in appropriate circumstances. Accordingly, if an individual owns a property outside England, Wales or Northern Ireland and acquires another within any of these jurisdictions, the individual will be liable to the additional rate of stamp duty land tax on the new purchase. As discussed above, it is likely that similar rules will apply for land and buildings transaction tax in relation to property acquisitions in Scotland.

As in other circumstances, the additional rate will not apply if the new property is purchased as a replacement for a previous main residence which is being sold, or has been sold within the past 18 months. The additional rate will also not apply if, at the end of the day on which the new property is purchased, the purchaser owns only one property worldwide.

Types of purchaser

Trusts and settlements
The government is concerned that trusts could be used as vehicles to hold property to avoid the additional rate of stamp duty land tax. Accordingly, it is proposing that beneficiaries with a life interest or interest in possession under a trust should be treated as if they have an interest in a residential property held by the trustees.

Other interests in trusts holding residential property – such as an interest in remainder (that a beneficiary will receive only on termination of the initial life interest) or a discretionary interest (where a beneficiary only has a right to be considered for benefit) – will not be considered in determining whether an individual has an interest in a residential property for the purpose of the additional stamp duty land tax charge. However, purchases of residential property by trustees of trusts with no interest in possession will be liable to the additional rate of stamp duty land tax.

For the purposes of determining whether the additional stamp duty land tax rate is due, a purchase of residential property by the trustees of a bare trust will be regarded as a purchase by the beneficiary of the trust directly.

Married couples and civil partners
The government intends to treat married couples and civil partners as a single unit for the purpose of the additional stamp duty land tax rate, unless their relationship has broken down and they are separated under a court order or a formal deed of separation executed under seal.

Thus, a couple may own one main residence between them at any one time and any additional residential property owned by either of them will be relevant in determining whether an additional property is being purchased. In a situation where a couple sometimes lives apart, the property that is their main residence will have to be determined by the facts, as discussed above.

Joint purchasers
In the case of joint purchasers, the government is proposing that if – at the end of the day of a transaction – any of the joint purchasers has an interest in two or more properties and is not replacing a main residence, the higher stamp duty land tax rate should apply to the entire consideration for that transaction. The government is seeking views on whether this is the appropriate treatment in this situation, given that for one or more of the other joint purchasers, the transaction could be an acquisition of a first property.

Partnerships
Partnerships will be treated as joint purchasers of property for the purposes of the additional rate of stamp duty land tax, as they are for other stamp duty land tax purposes. The government is open to considering reliefs and exclusions where this treatment may give rise to adverse effects on businesses, particularly small and medium-sized enterprises, such as farming partnerships.

Property purchased for children
If parents purchase a property for their children to live in, the additional rate of stamp duty land tax may apply, depending on the structure of the transaction and who will own the property. If, at the end of the day of the transaction, individuals or couples that acquire an interest in the property also own another property and are not replacing their main residence, the additional rate of stamp duty land tax will apply.

Accordingly, if parents purchase a property for their child to live in and have one or more additional properties, the additional stamp duty land tax rate will apply. If a parent acquires a property jointly with his or her child and owns another property, the additional stamp duty land tax rate will apply. However, if a parent gives money to a child to purchase a property, but the child will own the property – even if the parent is a mortgage guarantor – the additional rate will not apply, provided that the child does not also own an additional property. The government is considering an exclusion for de minimis equity interests to allow for situations where mortgagees require the parent to take an interest in the property in order to be a mortgagor for security purposes.

Timing issues

Overlap of purchase and sale
Individuals or couples that intend to move from one main residence to another, but complete the purchase of a new main residence before the sale of the old one (eg, where a property chain breaks down), will be liable for the additional rate of stamp duty land tax on the new purchase. However, if the previous main residence is sold within 18 months, a refund of the additional 3% paid will be available.

The government appreciates that paying the additional tax and claiming a refund may be burdensome to taxpayers. It is also concerned about the additional administrative burden for HMRC in processing such refunds. Accordingly, it is requesting views as to whether the test for ownership of one or more residential properties should be carried out when the stamp duty land tax return is submitted, rather than at the end of the day of the transaction. Under the existing rules, a stamp duty land tax return is due within 30 days of completion of a property acquisition (however, the government is planning to consult this year on changes including a possible reduction of this period to 14 days, with a view to such changes coming into effect in 2017 or 2018). The government is also considering options to avoid the need for payment of the additional rate and refund in wider circumstances, provided that a way to police such a relief can be found.

Delay between sale and purchase
In certain circumstances, there may be a delay between a sale of one main residence and a purchase of a replacement. In this situation, provided that a new main residence is acquired within 18 months of disposal of the previous one, the higher rate of stamp duty land tax will not apply.

Exclusions and reliefs

Non-residential property and mixed-use transactions
The additional rate of stamp duty land tax will apply only to purchases of residential property. There will be no change to the existing definitions of residential and non-residential property. Purchasers of non-residential property will not pay the additional rate, even if the property is later converted to residential use. 'Non-residential property' includes:

  • commercial property (eg, shops or offices);
  • mixed-use property (with both residential and non-residential elements);
  • six or more residential properties bought in a single transaction;
  • any other land or property not used as a residence;
  • forests;
  • bare land (even if subsequently used for residential purposes); and
  • agricultural land.

Mixed-use transactions – where residential and non-residential properties are purchased together in a single transaction – are treated as non-residential transactions for stamp duty land tax purposes. The government does not intend to change this treatment.

Stamp duty land tax on non-residential transactions or mixed-use transactions is paid on the entire purchase price at 4% for properties over £500,000.

Multiple residential property purchases
Where multiple dwellings are purchased in a single or linked transaction, this transaction is eligible for multiple dwellings relief. Under the multiple dwellings relief scheme, residential stamp duty land tax rates are applied to the average price of each property multiplied by the number of properties purchased, rather than to the total value of the transaction. This way, the overall stamp duty land tax paid will be closer to that which would have been paid had the properties been purchased separately.

If six or more properties are bought together, the purchaser can choose whether multiple dwellings relief should apply to the transaction, calculated including the additional stamp duty land tax rate where relevant or the non-residential stamp duty land tax rate, which will be charged on the full purchase price. For example, in a transaction involving 10 properties purchased for £3 million, with an average purchase price of £300,000, applying multiple dwellings relief with the additional rate will result in stamp duty land tax of £14,000 per property (£140,000 in total). In contrast, if the purchaser chooses to pay the non-residential stamp duty land tax rate of 4% on the total acquisition cost, this will give rise to stamp duty land tax of £120,000. This reverses the existing position, where the application of multiple dwellings relief at current residential stamp duty land tax rates would have resulted in a total stamp duty land tax rate of £50,000.

Charities and registered social landlords
Certain residential property transactions made by charities and registered social landlords are exempt from stamp duty land tax under existing rules. It is not proposed that charities and social landlords will be brought into the higher rates of stamp duty land tax in circumstances where they would currently be exempt.

Large-scale investors
The new additional stamp duty land tax rate is targeted at buy-to-let investors and purchasers of second homes who may affect others' ability to get on the property ladder. The government does not want to target investment that results in an overall increase in housing supply and takes the view that an exemption from the additional rate for investments that may give rise to significant development may be appropriate.

Multiple dwellings relief is available for bulk purchase of multiple completed units, but the rate paid will include the new additional rate. Alternatively, a purchaser of six or more residential properties may choose to pay non-residential rates, as appropriate.

While the consultation is not entirely clear on this point, it appears that an additional exemption to sit alongside multiple dwellings relief is proposed, whereby certain bulk purchases of off-plan and other residential properties may be exempt from the additional rates altogether.

At the time of the Autumn Statement 2015 it was proposed that an exemption from the additional rate be available to corporates and funds with an existing portfolio of at least 15 properties as of the transaction date. In contrast, the consultation suggests that such an exemption be targeted at the bulk purchase of at least 15 residential properties in one transaction and be available to both individuals and non-natural persons. This is on the basis that that an exemption by reference to significant investment may be better targeted to assist the government's housing objectives than one given by reference to an investor's existing portfolio. The government is seeking views on this issue. However, it seems that the government is considering the possibility of an exemption for diversely held entities similar to that available under the rules for non-resident capital gains tax, rather than focusing on bulk purchases.

Anti-avoidance

The consultation indicates that, unlike individuals, companies and collective investment schemes will be liable to the additional rate of stamp duty land tax on all residential property purchases of £40,000 or more, including the first such purchase. This is to prevent individuals from avoiding the additional 3% rate by acquiring additional properties through a company or collective investment scheme.

The higher 15% rate of stamp duty land tax becomes payable on the entire acquisition price for higher-value properties acquired by companies or non-natural persons other than for certain business purposes. While the consultation is not clear on this point, Her Majesty's Treasury and HMRC seem to have confirmed that the additional 3% rate of stamp duty land tax will not apply to acquisitions where the higher 15% rate is payable.

Planning considerations

Anyone considering an acquisition of residential property as a second home or investment property would be well advised to complete the acquisition before April 1 2016 if possible in order to avoid the additional rate of stamp duty land tax.

In percentage terms, the additional rate will be far more significant in relation to the overall stamp duty land tax cost on lower-value properties. As an example, on a property valued at £200,000, stamp duty land tax paid at existing rates would be £1,500. If the additional 3% rate is due, the stamp duty land tax rises to £7,500 – an increase of 400%. On the other hand, for a property valued at £2 million, stamp duty land tax at existing rates would be £153,750. With the additional 3% rate, the charge would rise to £213,750 – an increase of 39%. The percentage differential reduces further as the value of the purchased property increases, and would be approximately 26% for properties valued at £20 million. This makes sense, given that the charge is primarily targeted at buy-to-let investors and second-home buyers, who are seen to be competing with first-time buyers and preventing them from getting on the property ladder.

For property buyers that are more focused on investment rather than purchasing a residence, it may be more cost effective to invest in multiple purchases of six or more properties in the same transaction. In this way, the non-residential stamp duty land tax rate of 4% will be available. For higher-value properties, paying this rate may be preferable to paying residential rates, even with the benefit of an exemption from the additional 3% rate, as is proposed for bulk investments of 15 or more properties if this is introduced.

Alternatively, it will continue to be possible to invest in all forms of property through widely held corporate funds and real estate investment trusts. However, unless an exception is made for diversely held funds as is being considered, such funds may become liable to the additional charge on residential property acquisitions in certain cases. This may affect their attractiveness to some extent.

Comment

The additional rate will have a potentially punitive effect on all acquisitions of additional properties, especially those at the lower end of the market. For trustees and beneficiaries, the proposals are particularly unfortunate, as trustees of discretionary trusts and others without a life tenant will be liable to stamp duty land tax at higher rates, regardless of whether the property is the first acquired by the trust.

For beneficiaries with an interest in possession, the existing proposals will have implications for their personal property acquisitions, which are unlikely to be desirable – or even fair – in many cases.

It remains unclear whether there will be any relief for trusts for vulnerable people (whether minors or adults), unless such individuals are living in the property as their only or main residence. It is hoped that the government will consider this issue further.

For corporate entities or other collective investment schemes, the additional rate will make acquisitions of residential property even more expensive in future, at least where higher-rate stamp duty land tax at 15% is not already payable. This makes the scope of any exemption for bulk purchases or diversely held funds (which are being considered) particularly important.

The existing proposals will likely develop further following consultation and publication of draft legislation (likely to be on or after March 16 2016, the publication date of the UK Budget). In the meantime, individuals that are considering an acquisition of residential property in England, Wales or Northern Ireland should take advice on the potential implications as soon as possible.