The recent changes to the SDLT regime for residential property have been criticised for their adverse impact on buy to let investors. But what does this mean for Build to Rent? Athel Hodge examines the SDLT consequences of acquiring large scale residential properties for rent.

The private rental sector has grown exponentially in the last few years and now forms the second largest tenure in the UK. Set against the background of the current housing shortage and the lack of affordable homes for sale, this growth seems likely to continue and the recent Housing White Paper demonstrates the government's commitment to the sector; in particular large scale Build to Rent developments. However, the past few years have also seen the government make a series of changes to the SDLT regime clearly designed to make residential property investment less attractive, especially for traditional buy to let landlords. What does this new regime mean for Build to Rent developers and investors?

15% Corporate Rate

There is a flat rate of 15% SDLT rate payable where a company purchases residential land for over £500K. However relief is available where the property is to be used for qualifying purposes (which includes being used for a rental business). Clawbacks may apply if this benign use ceases within a certain time period.

3% surcharge for additional residential properties

Even if the 15% flat SDLT rate is avoided, corporate investors are still hit by the 3% surcharge introduced in April 2016 for purchasers of additional residential properties, which takes the rate back up to 15% for any element of the purchase price above £1.5m.

Residential Property

Given the above it will be no surprise that the definition of "residential property" can prove very important. Guidance from HMRC defines residential property as including property used as a dwelling, suitable for use as a dwelling or in the process of being converted to or adapted for use as a dwelling. For SDLT purposes therefore, it is generally more tax efficient to acquire a site before any conversion works have commenced (in order to enjoy the lower non-residential rates of up to 5%), although this will necessarily involve a greater degree of risk generally.

Multiple Dwellings Relief

That said, large scale investors in residential property, such as Build to Rent investors, may benefit from two additional reliefs. Where a purchaser acquires two or more dwellings from the same vendor as part of the same or linked transactions, then the purchaser could qualify for Multiple Dwellings Relief (MDR). Where MDR is claimed, the SDLT rate for each property is determined by dividing the aggregate consideration by the number of dwellings. This can reduce SDLT because the purchaser obtains the benefit of the lower threshold rates more than once in the computation. However, the rates applied will still be subject to the additional 3% surcharge and clawbacks may again apply if certain events occur within 3 years of the effective date.

The 6 dwelling rule

Perhaps more significant for large scale Build to Rent developers and investors is the "6 dwelling rule". A purchase of six or more dwellings in a single transaction is usually treated as a non-residential transaction for SDLT purposes, meaning much lower rates of SDLT are payable. Particularly where the total consideration is high, it is generally preferable to apply this rule in preference to claiming MDR. Note that the dwellings must have already been constructed for this to apply.

Mixed Use

Non-residential rates will also apply where the property purchased is in mixed use (for example a block of flats with commercial units below), although the extent of non-residential use would need to be relatively significant (ie using a couple of rooms in a house as a physiotherapy clinic would not be sufficient to take the property out of the purely residential category).

In conclusion, recent changes to the SDLT regime have created a further obstacle to the viability of residential property investments, although Build to Rent investors may be able to take advantage of reliefs targeted at purchasers of multiple units. In spite of these changes, however, investors remain keen to enter the Build to Rent market. It remains to be seen whether purchase prices will be reduced and/or rents increased to take account of the additional costs, or whether the government will follow through on their support in the White Paper by reducing the SDLT exposure for true Build to Rent developments.