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Stamp Duty Land Tax Higher Rates

STAMP DUTY LAND TAX HIGHER RATES FOR PURCHASES OF ADDITIONAL RESIDENTIAL PROPERTIES

by Andrew Rodgers

Controversial higher rates of Stamp Duty Land Tax (“SDLT”) will apply from 1st April 2016 to purchases of additional residential properties such as second homes and buy to let properties.

Chancellor George Osborne has turned his attention to buy to let landlords in recent budgets and spending reviews.

First, he announced reductions in mortgage interest relief from 2017, and he has now introduced an extra 3% charge on each SDLT rate band, which varies by property value.


Clearly the intention for this change is that while the Government believes it is right that people should be free to purchase a second home or invest in a buy to let property, it is aware that this can impact on other people’s ability to get on the property ladder, especially first time buyers.  The higher rate is to act as a disincentive to the purchase of buy to let properties so as to free up property stock for prospective home owner-occupiers.


The higher rates of SDLT will be three percentage points above the current SDLT residential rate.  They will be charged on the portions of value of the property that falls into each band namely as follows:-


Band Existing Residential SDLT Rates New Additional Property SDLT Rates

 

£0 – £125k 0%  3%
£125k – £250k 2% 5%
£250k – £925k 5% 8%
£925k – £1.5m 10% 13%
£1.5m+ 12% 15%

The higher rates will apply to most purchases of additional residential properties, where at the end of the transaction, an individual purchaser owns two or more residential properties and is not replacing his/her main residence.


The higher rates will also apply generally to purchases of residential property by companies.  In the case of joint purchasers, the higher rates will not apply where, at the end of the transaction, each purchaser owns only one residential property.


The higher rates will not apply to purchases of:-

  • transactions where the consideration is less than £40,000.00
  • non-residential or mixed use properties.
  • caravans, mobile homes and house boats.
  • properties where the contract has been entered into and substantially performed on or before 25th November 2015.

 

The Requirements for Higher Rate SDLT for Additional Residential Property Purchases to Apply


The rules dealing with individual and joint purchasers buying a single dwelling are slightly different for purchases of two or more dwellings by individuals.  Under the rules for the purchase of a single dwelling, the higher rates will apply to the purchase of a “major interest”, as defined in the existing SDLT rules, in a single dwelling by an individual, if at the end of the day of the purchase, conditions A-D below are met:-


Condition A:   the chargeable consideration is £40,000.00 or more;

Condition B:   the dwelling is not subject to lease which has more than 21 years to run on the date of purchase;

Condition C:   the purchaser owns an interest in another dwelling which has a market value of £40,000.00 or more and is not subject to a lease which has more than 21 years to run at the date of the purchase of the new dwelling; and

Condition D:   the dwelling being purchased is not replacing the purchaser’s only or main residence.


If any of Conditions A-D are not met, the higher rates will not apply to the purchase.  A major interest does not include a leasehold interest if the lease was originally granted for a period of 7 years or less.


In respect of Condition A, the £40,000.00 is not an allowance or 0% tax band, so if the chargeable consideration is equal to or more than £40,000.00, then the relevant higher rates apply to the whole chargeable consideration.


In respect of Condition B, whilst the provision is not entirely clear, it would appear the intention is that the purchases of reversionary interests in long leases would not attract the higher rate of stamp duty.


An interest in a dwelling outside of England, Wales and Northern Ireland is to be counted for the purposes of Condition C.  Other legal systems will often have different land law concepts and it is a question of fact whether an interest owned by an individual is equivalent to a major interest and whether it is for a term of more than seven years and not subject to a lease of more than 21 years.


For the purposes of condition D, there are two parts to a replacement of a purchaser’s main residence:

  • There must be disposal of the purchaser’s or their spouse or civil partner’s previous main residence, and;
  • The dwelling acquired must be intended to be occupied as the individual’s only or main residence.

There are two key elements to this:


  1. There will be deemed to be a replacement of a main residence if, in the three years ending with a purchase, the purchaser disposed of a major interest in another dwelling and that other dwelling was, at some time in the three year period, the only or main residence of the purchaser. There is also a replacement of the main residence if, in the three years ending with the purchase, the purchaser’s spouse or civil partner disposed of a major interest in another dwelling and that other dwelling was, at some time in the three year period, the only or main residence of the purchaser.

The three year period for this test will not be applied to purchasers completing on or before 26th November 2018.  This is a transitional provision so as not to disadvantage those whose last disposal of a main residence was before the announcement of the higher rates on 25th November 2015.


  1. There may be a situation where unavoidably the purchase of a replacement main residence completes before the date of the sale of the previous main residence. This may be, for example, where a purchaser was intending to sell their existing main residence prior to the purchase of a new main residence and the sale of the previous main residence fell through, but the purchaser proceeds with the purchase of their new main residence.  Following the purchase, the individual purchaser will own two residential properties and will not have replaced his previous main residence, so the purchase will be charged at the higher rate of SDLT.  This may seem unfair for the purchaser since the turn of events may well have been unintended.  The Government’s view is that it may be difficult to determine whether an individual has an intention to sell his previous residential property at this point and the Government must protect against tax avoidance.

However, the additional tax paid as a result of the transaction can be reclaimed by amending the return for the purchase if, in the subsequent three years after the purchase, the purchaser sells the previous main residence thereby replacing the main residence.  The previous main residence must have been the main residence of the purchaser at some time during the three years before the purchase of the new main residence.  There is also a replacement of a main residence if in the subsequent three years after the purchase, the purchaser’s spouse or civil partner sells a previous main residence.  Again, the previous main residence must have been the main residence of the purchaser at some time during the three years before the purchase of the new main residence.


Repayments need to be reclaimed within three months of the sale of the previous main residence, or within one year of the filing date of the return, whichever comes the later.  An SDLT Payment Request Form needs to be completed.

 


Clearly, the impact of this higher rate of SDLT for additional residential properties will be watched closely by all the stakeholders in the property market.  It remains to be seen whether it will have the desired effect of discouraging the purchase of buy to let properties and increasing owner-occupiers, or whether the purchase of additional residential properties will continue, with prices softening to absorb the extra SDLT.  Certainly, it is a matter of which all future purchasers of residential property should be aware and give full consideration to when budgeting for the costs of the purchase.



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