The Chancellor announced in the Autumn Statement on 25 November a significant change to the Stamp Duty Land Tax (SDLT) treatment of second homes.

What is the new SDLT surcharge?

From 1 April 2016 purchasers of additional residential properties will pay a 3% surcharge above the current SDLT rates; the new charge will catch second homes and buy to let properties.

The current SDLT rates remain in place for UK residential property not caught by the new surcharge.

The higher rates will not apply to purchases valued below £40,000. However, for any purchases of £40,000 and above the surcharge applies to the whole purchase price. For example, a purchaser of a second home costing £250,000 will pay SDLT of £10,000 as follows:

Click here to view table.

When will the new rates apply?

The higher rates will apply to all contracts entered into on or after 26 November 2015 where completion takes place on or after 1 April 2016.

The changes will apply to all completions taking place on or after 1 April 2016, but contracts that have been entered into on or before 25 November 2015 will not be liable to the new rates, subject to normal rules about variation or assignment of the contract.

If contracts are exchanged for an additional residential property on or after 26 November 2015 with completion on or before 31 March 2016 – the surcharge will not apply.

See Table below for comparison SDLT rates.

Click here to view table.

What are the transitional provisions?

The new SDLT surcharge will not apply in specified circumstances which fall within the transitional rules and subject to any further announcements from the Revenue; we expect the transitional rules to apply as set out in the attached schedule.

What are the exemptions from the SDLT surcharge?

Purchases of caravans, mobile homes or houseboats are excluded. Corporates or funds making significant investments in residential property are also exempt (this investment is seen as supporting the Government’s housing agenda). It remains to be seen what is a ‘’significant investment’’ for this purpose.

Will an exemption for corporates and funds owning more than 15 residential properties apply, as stated by the Chancellor? This is to be addressed in the consultation.

What happens next?

The Government will shortly consult on the policy detail; including the definitions of ‘main residence’ (this is relevant to explain how the new surcharge will apply when a principal private residence election is made) and ‘additional residential property’, the interaction of the higher rates with multiple dwelling relief and defining corporates and funds that make ‘significant’ residential property investment.

The consultation is expected to be published on 9 December 2015: However the Government have not committed to a timetable on the consultation and draft legislation.

What remains unclear?

There are a number of key areas which remain unresolved around the operation of the new surcharge. Here are our initial views on some of these where further clarification and details from the Revenue is required:

  • What is meant by ‘additional residential property’? The Chancellor gave buy to let properties and second homes as examples. We will need to wait for the consultation to gauge how widely this term will be defined and the types of property caught.
  • In particular, will a purchase by a non-UK resident, for personal use, necessarily be treated as a purchase of ‘additional residential property’? Will this be the case even if the purchaser does not own any existing residential property in the UK? The Government will need to take care to ensure that the legislation does not discriminate unfairly against purchasers from other countries. If the legislation does discriminate unfairly against such purchasers it will be susceptible to challenge under EU law. This risk is likely to mean that the legislation will allow some limited scope for a non-UK resident to purchase a property for personal use without the SDLT surcharge being incurred. This may be on the basis that the purchaser will use the property for a certain minimum number of days a year (perhaps 90). If this approach is taken, there will need to be provision for the surcharge to be imposed after the purchase, if there is insufficient use of the property, and the legislation may then be complex. We expect in any event that a non-resident purchasing a residential property as a holiday home or as a base to be used for just a few weeks a year will have to pay the surcharge.
  • How will the surcharge be policed? SDLT is a self-assessment tax; will the Revenue simply rely on purchasers making an appropriate declaration in connection with the purchase of the ‘additional residential property’?
  • What will amount to a variation of the contract under the transitional rules so the purchase is caught by the SDLT surcharge? No guidance as yet been provided. Historically, the Revenue has taken a restrictive view of ‘variation’ so any change to contract which is not de minimis, is treated as a variation.
  • How will the new regime apply to property purchased by trustees for example, when they buy multiple residential properties or where they buy a property for occupation by a beneficiary who also owns a residential property in the UK or elsewhere?
  • Will property owned by connected persons, for example spouses or partners in a partnership be caught?
  • Will the new regime catch a purchase in advance of the sale of a previous main residence? It is expected that this point will be covered in the consultation.
  • How will the new rules impact on large scale residential property owners who operate their property business as partnerships or trusts? Will they be caught by the additional surcharge?
  • What happens if a buyer purchases a property for one purpose and then there is a change in circumstances after the acquisition, for example, the property becomes a buy to let; will there be claw back provisions?
  • At present companies which acquire residential property worth over £500,000 in certain circumstances (there are complex rules around reliefs) pay 15% SDLT: Will these acquisitions be subject to the surcharge resulting in an SDLT rate of 18%? This would seem likely, based on our present understanding how the surcharge operates.

SDLT on residential property transactions is becoming increasingly complex, especially for a non UK resident buyer. It is recommended that advice is taken at an early stage to fully consider the SDLT and other potential tax liabilities connected with the purchase of UK residential property.