With the new 3% SDLT surcharge on purchase of additional residential properties coming into effect on 1 April 2016, publication of the draft legislation and accompanying HMRC guidance with the Chancellor’s Budget on 16 March 2016 was welcome.
Following the Government’s consultation on the new rules, some of the original policy design has changed; whilst the greater detail now available provides more clarity on a number of points, other areas remain unclear. With less than a fortnight between publication of the draft legislation and the new rules coming into force advisers have only limited time to review this complex legislation. Operation of the new higher rates is complicated and there are many traps; early advice is recommended fully to understand the SDLT liability.
This briefing is based on the draft legislation (which could be subject to further refinement or amendment as it passes through Parliament) and HMRC’s accompanying guidance.
KEY POINTS CLARIFIED BY THE LEGISLATION
- An individual owning more than one residential property is outside the higher rates on replacing their main residence.
- A three year period is allowed for sale of a previous main residence where the replacement has already been purchased (extended from 18 months under the original proposal). However, the purchaser will have to pay the 3% surcharge in the first instance and then reclaim it from HMRC following sale of the previous main residence.
- A three year period is allowed for purchase of a replacement property where the original main residence has already been sold (extended from 18 months under the original proposal).
- If a main residence was sold before 25 November 2015 (the date of the Chancellor’s Autumn Statement) the three years for purchase of a replacement runs from that date, not from the date of sale.
- Joint purchasers are subject to the new higher rate on the full purchase price, even where only one of them already owns a property, with no apportionment for the ‘first time buyer’.
- Married couples who are living separately in certain circumstances will not be treated as one unit for the purpose of the rules.
- Property which an individual owns anywhere in the world is taken into account in determining whether the new higher rates apply, but property already held in a company is ignored.
- No relief for large scale or portfolio investors (despite being suggested in the consultation document).
- Multiple dwellings relief remains available, subject to the new higher rates.
- If six or more properties are purchased in a single transaction the non-residential SDLT rates apply unless multiple dwellings relief is claimed.
- The top rate of SDLT for non –residential and mixed use property is increased from 4% to 5%.
The 3% surcharge above the standard SDLT (residential) rates applies from 1 April 2016 to purchases of certain additional residential properties by individuals (not replacing their main residence), where the consideration is £40,000 or more. Purchases by companies and trusts are also within the scope of the higher rates. Application of the higher rates is subject to transitional provisions.
A calculator is available on the gov.uk website which you can use to calculate the amount of SDLT due on purchases of additional residential properties: www.tax.service.gov.uk/calculate-stamp-duty-land-tax
The table below sets out the higher SDLT rates on residential property taking account of the new higher rates as applicable to each slice of the purchase price.
Click here to view the table.
If you are an individual use the chart below to check whether your transaction is subject to the higher rates.
Click here to view the chart.
*This chart has been reproduced from HM Treasury, Higher rate of SDLT on purchases of additional residential properties: summary of consultation responses (March 2016)
WHICH PROPERTIES FALL WITHIN THE HIGHER RATES?
The higher rates apply to a building (or part) that is used, or is suitable for use, as a single ‘dwelling’, or is in the process of being constructed or adapted for such use. This includes the gardens or other buildings used with the ‘dwelling’, for example a detached garage.
Guidance from HMRC indicates that the purchase of land or a building without the purchase of the actual ‘dwelling’ will be outside the regime.
Holiday homes, furnished holiday lettings and off-plan purchases are included within the scope of the higher rates.
Which properties are outside the higher rates?
The higher rates do not apply to purchases of:
- non-residential or mixed use properties;
- property purchased for chargeable consideration of under £40,000. (The £40,000 is not an allowance or a 0% tax band; if the chargeable consideration is equal to or more than £40,000 then the relevant higher rates apply to the whole chargeable consideration);
- caravans, mobile homes and houseboats;
- leasehold interests originally granted for a period of seven years or less; or
- freehold or leasehold reversions subject to a lease with more than 21 years unexpired at the date of completion.
PURCHASE OF A SINGLE RESIDENTIAL PROPERTY BY AN INDIVIDUAL
An individual is liable to the higher rates if they purchase an additional property and provided some further conditions are satisfied (see following paragraph). The higher rates apply if at the end of the day of completion the purchaser owns (interests in) two or more residential properties.
The further conditions that must be satisfied in relation to the additional property for the higher rates to apply are that (i) the purchase price is £40,000 or more (ii) it is not subject to a lease which has more than 21 years unexpired at the date of completion and (iii) the purchaser is not intending merely to replace their main residence (on this final condition, see further below).
“MULTIPLE DWELLINGS” PURCHASED BY AN INDIVIDUAL
There are special provisions to deal with the situation in which an individual, by way of a single transaction, purchases interests in two or more residential properties. An objective of these provisions is to ensure that in such “multiple dwellings” purchases, the higher rates either apply to the entire purchase price of the transaction, or to none of it. In other words, the higher rates cannot apply to part only of the purchase price; it is not possible under the new rules to separate the transactions.
The new rule for multiple dwellings purchases is broken down by the legislation into two parts. First, the higher rates will apply to the full purchase price on the acquisition provided: (i) one of the purchased properties is worth £40,000 or more and is not subject to a lease with more than 21 years unexpired (ii) the purchaser is not replacing his only or main home and (iii) at the end of the day of completion the purchaser owns one or more residential properties in addition to the purchased properties.
Secondly, where at least two of the purchased properties are worth at least £40,000 and are not subject to a lease with more than 21 years unexpired, then the higher rates are payable on the full chargeable consideration, regardless of whether the purchaser owns any other properties or is replacing his only or main residence (see example scenario).
Mr X is purchasing two flats in the same block in a single transaction. He intends to live in one of the flats and rent one out. He owns no other residential property. Will he be exempt from the higher rates of SDLT on the flat that he intends to live in?
No, the higher rates will apply to the purchase of both flats, although Mr X will be able to claim multiple dwellings relief on the purchases. (Under multiple dwellings relief the SDLT due is based on the average value of each flat, rather than the total amount paid for both).
Multiple dwellings relief (see further below) continues to be available but it applies subject to the new higher rates, where applicable. Purchase of six or more properties in a single transaction (or linked transactions) continues to be charged at the non-residential rates unless multiple dwellings relief is claimed. It will be necessary in the circumstances of each transaction to determine whether it is advantageous to claim multiple dwellings relief.
REPLACING YOUR MAIN RESIDENCE
Broadly speaking, provided an individual is merely replacing their existing only or main residence, and regardless of how many other properties they own at the end of the day of completion, the higher rates will not apply to the replacement purchase.
For example, although an individual may own several buy-to-let properties, the higher rates do not apply to the purchase of a new main residence to replace their existing one, provided they own only one main residence at the end of the day of completion.
For a purchase to count as the replacement of an only or main residence, first, there must be a disposal (by way of sale or otherwise) of the purchaser’s previous main residence, and secondly, the replacement property must be intended to be occupied as the individual’s only or main residence.
A purchaser who has had to pay the higher rates of SDLT because they bought a new main residence before disposing of their previous main residence, is entitled to a refund of the additional 3% SDLT if they dispose of the previous main residence within the following three years and provided that the sold property had been their main residence at some time during the three year period prior to purchase of the replacement. The period allowed for disposal of the previous main residence (without paying the higher rates) has been extended from the 18 months originally proposed (see example scenario).
Mr A owns and lives in a house in London as his main residence until 1 June 2014. On this date he moves out of his London house and lets it out. He moves into rented accommodation where he stays until 1 June 2016. On 1 June 2016 he moves out of his rented accommodation and completes the purchase of and moves into a replacement main residence in Somerset. He is liable for the 3% SDLT surcharge on purchase of the Somerset house because on the date of completion he owns two residential properties.
On 31 May 2018 he completes the sale of his London house: Following this sale he is entitled to claim a refund of the 3% SDLT surcharge because (a) he has sold his previous main residence within three years after purchasing the replacement and (b) at some point within the three years before buying the Somerset house, the London house had been his only or main residence.
The refund must be claimed within three months of the sale of the previous main residence, or within one year of filing the SDLT return on the purchase of a replacement property, whichever is the later.
A purchaser who owns more than one property and disposes of their main residence without immediately purchasing a new one, will pay standard (not higher) SDLT rates provided (i) they purchase a replacement main residence within three years of the sale and (ii) at any time during that period of three years the property sold had been the purchaser’s main residence. The proposed maximum gap between the sale of a main residence and the purchase of a replacement main residence has been extended to three years from the 18 months period in the Government’s original proposal.
Renting a residence (under a tenancy agreement for less than seven years) in the period between the sale of the previous main residence and the purchase of the new one, will not prevent the purchase from being a replacement of a main residence.
Where the main residence was sold before 25 November 2015 (the date of the Autumn Statement), the three years allowed for purchasing a replacement property (without the higher rates applying) runs from that date, not the date of the sale. This means a buyer would need to buy their replacement main residence before 26 November 2018 in order to come outside the higher rates. This provides a transitional rule for those whose last sale of a main residence was before the higher rates announcement on 25 November 2015.
Please note that application of the rules can be more complex where married couples and civil partners replace a main residence.
WHAT IS A MAIN RESIDENCE?
Where an individual owns more than one residential property, there is no option to ‘elect’ for a particular property to be the main residence. HMRC guidance provides that where an individual lives in only one property that will be their main residence. Where an individual lives at more than one property, all of the facts and circumstances of the particular case must be considered in order to conclude which residence is the main residence.
HMRC’s guidance set out a list of points to consider when establishing which residence is an individual’s main residence (see left insert).
CONSIDER THE FOLLOWING:
- If the individual is married or in a civil partnership, where does the family spend its time?
- If the individual has children, where do they go to school?
- At which residence is the individual registered to vote?
- Where is the individual’s place of work?
- How is each residence furnished?
- Which address is used for correspondence?
- Where is the individual registered with a doctor / dentist?
- At which address is the individual’s car registered and insured?
- Which address is the main residence for council tax?
In respect of the new property purchased, it is a question of intention at the time of purchase; does the purchaser intend the property to be the only or main residence? What has the purchaser acquired the property for? An intention to occupy the property immediately is not needed if, for example, some works are to be carried out before occupation. If the property is intended to be put to other uses, for example, if it is to be let, then the ‘intention test’ will not be met and this is not a main residence. Although in most cases establishing intention should not be problematical, there will be rare cases in which, as the HMRC’s guidance puts it, “the purchaser’s genuine intention at the time of purchase [is] frustrated by events”; however no solution is proposed for such cases.
PURCHASES BY COMPANIES
The higher SDLT rate applies when a company buys a residential property for £40,000 or more, provided it is not subject to a lease with more than 21 years unexpired. Unlike purchase by individuals, the higher rates apply to companies even on their first or only purchase of a residential property and regardless of whether the purchased property is a replacement for a main residence.
Note however, that companies already pay 15% SDLT on the purchase of a residential property for over £500,000 for owner occupation. The new rules will not further increase this rate.
Shareholdings in a company which owns residential property are left out of account when determining whether the individual shareholder is liable for the higher rates on purchase of an additional residential property.
On a “multiple dwellings” purchase by a company in a single transaction, the higher rates apply, provided one or more of the purchased properties is not subject to a lease with more than 21 years unexpired (and is worth £40,000 or more).
The higher rates apply to a purchase jointly by two or more individuals, if any one of them already owns a residential property (or an interest in a residential property) and is not merely replacing their only or main residence. Interests taken into account in this regard include trust interests, no matter how small. This can operate unfairly, for example, on a joint purchase by three individuals one of whom already owns a 10% interest under a family trust in a residential buy-to-let property. In such a case the higher rates will apply to the entire purchase price of the joint purchase, even though two of the joint purchasers will own only one residential property at completion.
With this in mind, some would-be purchasers may wish to review family trusts and other interests in residential properties in order to consider whether beneficiaries might unexpectedly find themselves subject to the higher rates on purchasing a home.
PURCHASES BY PARTNERSHIPS
The basic principle is that residential property held in a partnership is treated for SDLT purposes as if jointly owned by the partners. However, in determining whether the higher rates apply on the purchase by an individual partner in a trading partnership of property for their personal purposes (and not for the purposes of the partnership) any residential property held in, or for, the partnership for its trading purposes is ignored. Note that in this context a property letting business or any business exploiting land for rent carried on by a partnership is not a trade.
PURCHASES BY MARRIED COUPLES AND CIVIL PARTNERS
Married couples and civil partners who are living together are treated as a single unit for the purposes of the higher rates. This means, for example, that if one of a couple already owns a residential property in their own name, then the purchase of a home in the sole name of the other partner will trigger the surcharge. Care is also needed in relation to married couples on purchase of a replacement main residence as the rules can be complex in such situations.
If a couple separate in circumstances where this is likely to be permanent, they cease to be treated as a unit. They can then each separately purchase a main residence without triggering the higher rates, (provided they do not already own an interest in a further residential property). This is a relaxation of the rule in the original proposal under which separating couples would continue to be treated as a single unit unless and until they entered into a formal separation.
Whether the higher rates apply to residential properties held in trust depends on the nature of the trust and the beneficiaries’ interests.
If a bare trustee purchases residential property, the trustee is ignored in determining whether the higher rates apply to the purchase. In such a case it is the beneficiary or beneficiaries absolutely entitled under the bare trust who are treated as the purchaser and, following the purchase, as the owner of the property. The higher SDLT rates will apply on the trustees’ purchase if the beneficiary already owns a residential property. For so long as the property continues to be held by the trustees, it is treated as belonging to the beneficiary for SDLT purposes. If the beneficiary subsequently purchases a property in their own name (having not initially owned one) they will be subject to the higher SDLT rates on such later purchase.
The position is similar where trustees purchase or hold a residential property on so-called “interest in possession” trusts, i.e. trusts under which one beneficiary or several beneficiaries (without being absolutely beneficially entitled, as under a bare trust) have the right under the trust to occupy a property for life or to receive the income from a residential property (or a share in such property) held in the trust. It is the beneficiary who, for the purposes of the higher rates, is treated as purchasing or holding the property.
If the trustees of a bare trust or an interest in possession trust hold on trust for a child aged under 18, the child’s parents (and, if the parents have divorced and remarried, then the spouses or civil partners of each of them) are treated as purchasing, holding or disposing of the property for the purposes of the higher SDLT rates. One effect of this rule is that parents cannot avoid the higher SDLT rates on the purchase of an additional property by purchasing it on bare trust for their child or children.
The position is different if the trust in question is neither a bare trust nor a trust for life or income, for example if it is a discretionary trust under which the beneficiaries receive income or capital only in the trustees’ discretion and do not have any specific interests in trust assets. Here the higher SDLT rates are payable on any purchase by the trustees of a residential property as a trust asset, including the first or only such purchase. However, this is not relevant to purchases of residential property by the trustees in their personal, non-trustee, capacity. Residential property held in a trust which neither confers entitlement on beneficiaries to occupy such property for life, nor to receive the income from it is ignored in relation to purchases by the beneficiaries of residential property in their own right.
There are further scenarios in which beneficiaries occupy property held in trust and you will need to take specific advice on how the rules apply in each case.
In determining whether the higher rates apply to an individual’s purchase of a residential property, it is necessary to take account of any property which that individual has inherited.
In this context the individual will be treated as entitled to the inherited property once it has been transferred to that individual (or, if earlier) once the estate administration has been completed, i.e. the amount of the residue after payment of debts, taxes and legacies has been ascertained.
However a special rule applies where the inheritance is a 50% or less share in a residential property. In this case, the inherited interest will be ignored for up to three years from the date of the beneficiary becoming entitled to it in determining whether the higher rates apply to the beneficiary’s purchase of another residential property.
Care is needed in the case of non-UK inheritances. In some countries the beneficiary of an estate is treated as entitled (and thus liable to the higher rates on any UK purchase) from the moment of the death (and not only on completion of the estate administration, as in the UK). Subject to this, the 50% interest exception applies as for UK properties.
Property owned (or sold) by an individual anywhere in the world is taken into account in determining whether the higher rates apply to the purchase of a residential property in the UK. However property already held in a company is not taken into account for these purposes.
If an overseas property is owned by a non-UK entity, such as a foundation, care will be needed in determining whether the entity itself is to be treated as the owner or whether the property is to be treated as owned by the individuals who may benefit from such foundation (or other entity). This will at least partly be a question of applying the relevant foreign law. In the second case, the property will need to be taken into account in determining whether the higher SDLT rates apply.
The legislation does not include provisions dealing specifically with lease extensions and purchase of freehold reversions. However the new higher rates are potentially applicable in these situations and consideration must be given to whether the conditions for the higher rates to apply are satisfied. The application of the rules in these contexts are particularly complex and appear to produce anomalies in some scenarios. In view of this it will be important to seek professional advice in relation to lease extensions and purchasing freehold reversions.
MULTIPLE DWELLINGS RELIEF (“MDR”)
The original proposals for the higher SDLT rates included an exemption for bulk purchases of 15 or more properties by certain types of entities, including companies. This proposal has been dropped from the draft legislation.
MDR nevertheless remains available, but with the higher rates applying where relevant. MDR, which applies where two or more properties are purchased in a single transaction (or in linked transactions), works by taking the average chargeable consideration for each property and charging SDLT accordingly. This is likely to produce an overall lower rate of SDLT than if SDLT were applied to the aggregate chargeable consideration, depending on the particular transaction.
The purchase of six or more properties in a single transaction continues to be treated as commercial for SDLT purposes, attracting SDLT at the non-residential rates, unless MDR is claimed. Purchasers will need to determine in the circumstances of each case whether it is advantageous to claim MDR.
NEW SDLT RATES ON NON-RESIDENTIAL AND MIXED USE PROPERTY
From 17 March 2016 there are new, higher SDLT rates payables on purchases of non-residential and mixed use property. For further detail on this see our briefing - Budget 2016 Briefing: Changes affecting corporate real estate.
Under the transitional rules, the surcharge will not apply where contracts were exchanged on or before 25 November 2015 (and the purchase completes on or after 1 April 2016), unless after 25 November 2015 the contract has been varied or assigned, completed following the exercise of an option or pre-emption right, or has been assigned or is subject to a sub- sale. In these situations, the higher rates will apply.
The Revenue’s guidance provides minimal explanation as to what will amount to a variation of a contract. This would include a change to:
- the land being purchased,
- the parties to the contract, or to the contractual consideration, or
- in an agreement for a lease, to the term length.
However some changes, for example to prescribed colour schemes or to contractual completion date, may be too insignificant to amount to a variation.
Any steps which could amount to variation of pre-26 November 2016 contracts should be avoided because of the risk of bringing the purchase into the SDLT higher rates.
SOME CONCLUDING COMMENTS
There will be numerous situations where the timing of a sale and purchase will be crucial in determining whether or not the SDLT higher rates will apply. This is particularly the case if you are replacing your only or main residence, but you are not completing your sale and purchase of your new main residence on the same day.
There are a number of anomalies in the application of the legislation. For example, an individual who already owns a buy-to-let property and then purchases their first main residence will pay the 3% additional SDLT on the purchase, because at the end of the day of completion the individual will own more than one residential property. However if an individual who already owns a buy-to-let property replaces their main residence, they will not be liable for the additional 3% SDLT rate on their purchase. In other words, the first-time buyer of a main residence is in a worse position than an individual who replaces their main residence, a position which seems illogical and contrary to the Government’s purpose of supporting home ownership for first-time buyers.
This is also seen with joint purchases. If any one of the joint purchasers already owns a share, no matter how small, in another residential property, then the 3% additional rate will be payable on the total price of the joint purchase, even though none of the other purchasers has an interest in another residential property.
In light of such scenarios, some individuals and families may wish to review their trust and property owning arrangements to take account of the new SDLT rates.
From being a tax on transactions, it appears that the new SDLT higher rates charge is referenced as a tax applicable to an individual’s particular circumstances, with all the complexity which this encompasses. Can this be regarded as a shift in focus of the SDLT regime away from transactions to the taxpayer?
QUESTIONS AND ANSWERS
The Revenue’s guidance helpfully sets out commonly raised Q&A’s some of which we have repeated from the publication, HM Revenue & Customs, Stamp Duty Land Tax: higher rates for purchases of additional residential properties. Guidance Note (16 March 2016). To review in full, you can access the guidance here HMRC Guidance Note.
Q. I jointly own a buy-to-let property with 4 friends. The property is worth £150,000, with my share being worth £30,000. I currently live with my parents but am now looking to purchase a home to live in. Will I have to pay the higher rates of SDLT on this purchase?
A No, as your share of the buy-to-let property is under £40,000, the higher rates will not apply.
Q. I own a holiday home in Cornwall and a house in London which is my main residence. I am in the process of selling my main residence and purchasing a new one. I may not be able to sell my current main residence before I complete on the purchase of the new one – will I have to pay the higher rates?
A. Yes, the higher rates will apply, as following the purchase of your new property you will own an additional residential property and will not have replaced your main residence. However, if you sell your current main residence within 3 years of the purchase of the new one you will be able to claim a refund from HMRC.
Q. I am helping my son purchase a property that will be his main residence. My son is a first time buyer but I own another property which is the family’s main residence. I will have a 30% share in the property and my son a 70% share. Will we have to pay the higher rates of SDLT?
A. Yes, the higher rates will apply as following the purchase you will own an interest in an additional residential property and will not have replaced your main residence, i.e. sold your current main residence and purchased a new one.
Q. I have a share in a limited company which owns a property for rental to tenants. I am purchasing another property which I will own direct. I do not own any other residential property. Will I have to pay the higher rates apply?
A. No, shareholdings in a company that owns residential property will not be counted when determining if an individual is purchasing an additional residential property, although the company may be liable to the higher rates if it purchases residential property. As this is your first purchase of a residential property the higher rates will not apply.
Q. We are trustees of a discretionary trust. We are purchasing a residential property. Will we have to pay the higher rates of SDLT?
A. A trustee of a discretionary trust purchasing a residential property will be subject to the higher rate of SDLT, even if the property will be its only residential property. There are no special exemptions from the higher rates of SDLT for discretionary trusts.