For the first time in almost 800 years, the Welsh Government is introducing a new tax. On 1 April 2018, Land Transaction Tax (“LTT”) replaced Stamp Duty Land Tax (“SDLT”) that used to apply to land transactions involving Welsh land. We consider who will be the big winners and losers following this change.

What is LTT?

SDLT ceased to apply in Wales this month. Instead, LTT is payable when you buy or lease a building or land over a certain price. LTT is governed by the Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act (the “Act”), which is the second of three pieces of legislation to establish devolved tax arrangements in Wales.

The Act follows that of SDLT legislation, however changes have been made with the aim of simplifying the tax and making it fairer and more efficient to administer, with a focus on Welsh needs and priorities.

How do the LTT rules differ from SDLT?

Stamp Duty Land Tax Land Transaction Tax
SDLT includes a number of specific rules to tackle potential avoidance activity of particular reliefs.

The Act includes a single, clear rule applicable to all reliefs. This prohibits a relief from being claimed where the transaction forms part of tax avoidance arrangements.

The rent element of newly granted residential leases is chargeable under SDLT.

The rent element of newly granted residential leases is exempt from tax under LTT.

There are no specific rules in respect of higher rate residential property transactions.

LTT contains additional rules for higher rate residential property transactions. Some of these are outlined below:

- Acquisitions of certain residential properties are exempt from higher rates where an interest in a dwelling is retained by the buyer pursuant to a court order in cases of divorce or dissolution of a civil partnership;

- Whether a taxpayer owns or acquires a residential property subject to a lease is judged at the end of the effective date of the acquisition of the residential property. This is a relief targeted at anti avoidance, preventing taxpayers from manipulating the rule to avoid paying the higher rates;

- LTT requires an assessment for the higher rates tax liability to be undertaken on ‘intermediate’ transactions; and

- There are changes to rules relating to property that is inherited. Spouses or civil partners who are no longer living together are not to have their respective interests combined in order to establish whether the interest held exceeds 50%.

The new rates and bands

The new rates are progressive, resulting in buyers of lower value properties paying less LTT than they would have under the SDLT regime. Similarly, buyers of higher value properties will pay substantially more LTT compared to SDLT.

Commercial property rates compared

Property price LTT Rates SDLT Rates
£0 - £150,000 0% 0%
£150,001 - £250,000 1% 2%
£250,001 - £1 million 5% 5%
Over £1 million 6% 5%

There are similar adverse effects on higher value commercial leasehold transactions. Where the Net Present Value of the property subject to a commercial lease is over £2 million, the LTT rate is 2%, yet under the SDLT regime this 2% rate of tax only takes effect when the Net Present Value of the property exceeds £5 million.

Residential property rates compared

LTT Rates   SDLT Rates
Price Rates Price Rates
£0 - £180,000 0% £0 - £125,000 0%
£180,001 - £250,000 3.5% £125,001 - £250,000 2%
£250,001 - £400,000 5% £250,001 - £925,000 5%
£400,001 - £750,000 7.5% £925,001 - £1.5 million 10%
£750,001 - £1.5 million 10% Over £1.5 million 12%
Over £1.5 million 12%

In keeping with the current SDLT regime, however, purchasers of additional residential property or any purchase of residential property by a company will be subject to an additional rate of 3% LTT.

What the changes mean in practice

The Welsh Government’s changes are aimed at assisting those purchasing properties at the lower end of the market. In residential property transactions, the point at which LTT becomes more expensive than SDLT is the £400,000 threshold.

Interestingly, the abolition of SDLT for first-time buyers purchasing properties of up to £300,000 in England will not be mirrored in the new Welsh regime. The LTT rates apply to all buyers equally, regardless of whether it is their first house purchase or not. Despite this, the Welsh Government has estimated that, by increasing the LTT threshold to £150,000, the average first time buyer in Wales will pay no LTT.

Whilst the changes in residential rates are unlikely to have a substantial effect, perhaps the most significant impact will be seen in the commercial property market. The Welsh Revenue Authority has created an LTT calculator to assist in calculating the rates payable, which can be found here.

When inputting the same information for an SDLT calculation into the LTT calculator, we came up with the following results:

  • Where a commercial property is being purchased for £4 million in Wales, the amount of LTT due would be £218,500 from 1 April 2018.
  • Where a commercial property is being purchased for £4 million in England, the amount of SDLT due would be £189,500.

It is not clear how the additional £29,000 of tax payable in the example above will impact on large commercial property developments; however the squeeze on profit margins is not likely to go unnoticed. There is the potential for the additional 1% tax on transactions over the £1 million threshold to depress property development, deterring developers from carrying out developments in Wales.

The Welsh Government has forecasted that overall tax revenues will be higher under the LTT regime, although it has recognised the potential negative impact on commercial property values and transactions. It remains to be seen whether this potential decrease in property prices and number of transactions will impact on the predicted higher revenues.