The Welsh government has announced its intention to “switch off” UK Stamp Duty Land Tax (SDLT) in Wales from April 2018 and replace it with a new property tax called Land Transaction Tax (LTT). Investors, occupiers and practitioners who operate in the Welsh property market will need to be “switched on” to what these changes will mean for them.

1. Background

The motivation behind the introduction of the first new tax in Wales for over 800 years, unsurprisingly, is financial. The settlement provided by Westminster to Cardiff is to be reduced by the amount of SDLT that was collected up until the so-called “switch off”. If the Welsh government does not introduce its own version of SDLT it will lose this revenue. SDLT collections in Wales in 2016-17 are forecasted to be £198 million, so it is an income stream that the Welsh government cannot afford to lose.

It is intended that LTT broadly replicates SDLT and there will be no changes for change’s sake. We are told that where there are changes, these will ensure that LTT is simpler, more efficient and fair for taxpayers. The system is one that is intended to be recognisable from day one, but of course there will be differences that clients and practitioners will need to be aware of when calculating the amount of LTT due and submitting the forms and paying the taxes.

2. The differences

One of the main differences will relate to the rates. These were recently published and there are minor differences from the SDLT rates; in some cases the rates are slightly higher, in others they are slightly lower. The threshold for paying LTT on residential transfers is also higher than that for SDLT, which will be welcomed by first-time buyers.

The other main difference will be to whom the returns are submitted and tax-payable to. The Tax Collection and Management (Wales) Act 2016 puts in place the legal framework necessary for the future collection and management of LTT in Wales. It will be the Welsh Revenue Authority, rather than HMRC, who will be responsible for specifying the form and contents of the return. If any LTT is due on a transaction, it will also need to be paid to the Welsh Revenue Authority. Practitioners will need to sign up to a new online portal and get to grips with the new system.

3. Practical considerations

There will be issues that cause concerns for practitioners, in particular relating to where the exact position of the border between England and Wales falls and the mechanism for establishing into which taxation regime a transaction falls. It is also expected that there will be properties which straddle the border and the current proposal is for the property value to be apportioned accordingly and for both an SDLT return and LTT return to be submitted. Of course, that could mean that the transaction falls below the relevant thresholds in each regime and no tax is due when would otherwise normally have been the case.

Issues are likely to arise over how portfolio sales which include both English and Welsh properties will be dealt with (especially when the buyer wants to apply for a collective relief (for example the multiple dwellings relief)).

Further clarification will also be required as to how practitioners deal with the situation where a supplemental return is required and the transaction has moved between the SDLT and LTT regimes. For example:

  • a shop premises in Cardiff is let on a turnover rent basis.
  • SDLT is paid at the time of grant based on the tenant’s reasonable estimate of what the turnover and therefore the rent is likely to be, but a further return would usually be submitted and any additional tax paid once the turnover is known and the rent becomes ascertainable.
  • To where should the further return be submitted? To whom should any additional tax be paid? These points require thought before the regime change.

As with any new system, clients and practitioners will need time to get to grips with the nuances of the new legislation. There needs to be widespread publication of the new rules, as many practitioners (who are qualified in the law of England and Wales) and clients who instruct them will be unaware of the imminent changes in the Welsh property taxation system.