The Budget on 16 March 2016 affected the rural property market in two ways.
- “Slice” system for mixed used transactions – even if they include one or more residential properties, the sale of a farm is subject to “commercial” rates of SDLT rather than the “residential rates” for SDLT. Until 17 March, that meant that, unless the purchase was by a company and included a very valuable dwelling, SDLT would be calculated by applying 4 per cent to the total property price at the most.
From 17 March instead of the “slab” approach, with the entire price being paid at a single rate, we now have the “slice” system, with different slices of value being charged at different rates. The slice below £150,001 does not attract SDLT: the slice between £150,001 and £250,000 is calculated at 2 per cent: and the slice above £250,000 is calculated at 5 per cent.
The slice system avoids the “cliff edge” marking the difference between, say, 3 per cent on £500,000 or 4 per cent on £500,001. The temptation to agree unrealistic valuations of non-chargeable items such as chattels or entitlements in order to reduce the property price and stay at the lower level is therefore reduced.
The overall effect is that more SDLT will be payable by the buyer if the price is more than £1,050,000. An estate purchased at £10 million will now cost the buyer £489,500 instead of the previous liability of £400,000.
- Additional residential property surcharge – the “second homes” surcharge of 3 per cent on the applicable residential rate could have a serious effect on the rural residential market in many parts of the country. Not only does it affect the city dweller’s holiday cottage in Cornwall, but it also affects the lifestyle purchaser in the Cotswolds who, in buying a large house also acquires a gardener’s cottage as the “additional residential property”. The whole purchase price for both Cotswold houses could be subject to the additional 3 per cent rate. However, draft legislation produced recently to deal with the exclusion of “granny annexes” from the scope of the additional charge may well cover gardeners’ cottages too. The cottage would, if the legislation is enacted as drafted, need to be in the grounds of the main house and the value of the main house would need to comprise at least two thirds of the value of the transaction.
The lesson for those buying rural properties is to think about their SDLT liability at an early stage. Taking care over the identity of the property to be acquired is likely to be a better protection against an increased SDLT bill than attempts to manipulate structures or value during the transaction.
For a fuller account of the changes to SDLT see our article: Budget 2016 update: additional 3% SDLT on additional residential properties.