When buying a new build house or apartment off plan, there is often a lengthy period of months or even years between exchange and completion. An important thing to bear in mind is that there could be tax changes between exchange and completion which may affect:
- the amount of tax you pay and
- the most tax efficient structure for purchasing the property.
A prime example of this has been the changes in stamp duty land tax (SDLT) rates on residential property over the past few years which have led to potential significant increases in the amount of SDLT payable on residential property.
Where these changes in SDLT have occurred, the rate at which you pay tax depends on when you exchanged contracts. If the rates change between exchange and completion, as a concession, you can elect to pay tax at the rate in force at the date of exchange.
Therefore if tax increases are widely anticipated in the next budget, it is worthwhile trying to exchange contracts before that increase is introduced to preserve the right to pay at the lower rate.
It is important to note that the ability to pay SDLT at the old rates will be lost if there is any variation to the contract. It is therefore vitally important that you don’t agree any variation to the contract between exchange and completion or you could potentially be losing hundreds of thousands of pounds of tax savings.
There may also be tax changes between exchange and completion which make it more tax efficient to change the entity who is purchasing the property.
For example where an individual is named as the buyer in the contract, you may wish to change to a trust or corporate structure or to purchase in the name of the buyer’s spouse or children.
There is no automatic right to assign the contract and, in fact, the standard conditions which apply to most residential contracts prohibit assignment. You therefore need to insist upon a specific right to assign the contract.
Ideally, you would want a clause allowing assignment to any third party but at the very least you would want a right to assign to another entity connected to the original purchaser at the original purchase price.
You should be aware that an assignment will have the same effect as varying the contract and you would lose any benefit from completing at an earlier tax rate. Therefore, if there are multiple tax changes you will need to assess which will give you the greater benefit, assigning the property to a different entity or preserving the tax rate in force at the date of exchange.