Background

A new top rate of five per cent Stamp Duty Land Tax (SDLT) has been introduced payable on residential property with a purchase price of more than £1 million. This rate increase took effect on 6 April 2011.

A contract for sale entered into before 6 April 2011 but completed after that date will be subject to the new SDLT rates. There are limited transitional provisions whereby any outstanding contracts entered into before 25 March 2010 but completed after 6 April 2011 will still be taxed under the old rates so long as there has been no variation or assignment of the contract, and it does not involve a sub-sale or the exercise of an option.

Note, however, that once SDLT relief on bulk purchases of residential property has been introduced as proposed in the recent Budget, that relief will take precedence over the five per cent rate and may indeed reduce the rate of tax even further to as little as one per cent on certain multiple residential acquisitions.

Meaning of residential property

Under the SDLT rules “residential property” means a building (or part of a building) that is used or suitable for use as a dwelling. Homes in the course of construction or conversion projects are included. The definition also extends to land forming part of the building’s garden or grounds and any outbuildings on that land.

There are a number of further detailed provisions so, for example, a hotel or inn is specifically provided not to be residential property. It is also interesting to note that the sale of six or more dwellings together in a single transaction will not be treated as residential property for the purposes of the five per cent rate. This would, for example, exempt the sale of an entire block of flats from the new five per cent top rate of SDLT.

Mixed-use property

The upcoming change in SDLT rates raises an interesting question regarding mixed-use property. Different SDLT thresholds apply for residential and non-residential / mixed transactions. From 6 April 2011 the thresholds and rates are as follows:

Click here to view the table.

What then, is the position where a transaction is part residential and part non-residential? Consider the sale of a property which includes a shop on the ground floor and living accommodation on the above floors for £2 million. Under the current SDLT legislation, regardless of whether the residential element of the transaction is worth £1.9 million and the non-residential only £100,000, the transaction is treated as one of mixed property. On this basis, the four per cent tax rate will apply to the whole price instead of the higher five per cent rate you might otherwise expect.

In some cases it may of course be difficult to distinguish between a sale which is mixed and one which is purely residential. For example, the sale of a farm with farmhouse, garden, outbuildings and agricultural land will clearly be mixed-use property taxed at four per cent whereas the sale of a substantial family home with a large garden will be residential property taxed at five per cent. Between these two extremes there may be more marginal situations including, perhaps, the delightful rural home with an adjoining small field let on a grazing licence. In each such case it may be a question of fact and degree to determine the correct rate of SDLT.  

HMRC approach

HMRC have recently issued brief guidance on the new five per cent rate of SDLT which confirms that the new top rate of SDLT will only apply to transactions which consist solely of residential property. If a buyer buys a number of different properties from the same seller (or parties connected with the seller) as part of the same deal or arrangement such that they are treated as “linked transactions” for SDLT purposes then again the new five per cent rate only applies if all the land transferred is residential. This should apply even if the linked transactions are completed by separate transfers.

If HMRC take issue with transactions of mixed property with a residential element of over £1m and feel that the current law is being abused, then they may seek to change the rules. They could withdraw the concept of “mixed-use” properties and instead require an apportionment of the consideration between the residential and non-residential elements on a just and reasonable basis.

It should be noted that in the recent Budget the Chancellor indicated that further work would be done in the coming months to combat widespread avoidance and evasion of tax on high value residential property by the wealthy. We wait to see whether HMRC seek to introduce any fresh measures in relation to expensive properties. It is clearly likely that HMRC will closely monitor how this new five per cent rate of SDLT is applied in practice.