Budget 2016 – Higher Rates of Stamp Duty Land Tax on purchases of additional residential properties.

16th March 2016

In his Budget today George Osborne announced a major change to the taxation on the purchase of residential properties.

Since the recession many of us have rushed to buy “buy-to-let” properties to profit from soaring house prices and to top-up inadequate pension pots.  The Government believes that this has contributed to a lack of housing stock for first time buyers and as part of its effort to free up such properties it announced back in November 2015 that subject to a consultation period leading up to today’s Budget (16th March 2016) for any properties being bought where contracts have been exchanged since the 25th November 2015, if they complete after the 1st April 2016 purchasers will be required to pay an additional rate of 3% Stamp Duty Land Tax if on completion:

  1. They own two or more properties; and
  2. They have not sold simultaneously (or within 36 months before the transaction) their main residence to move into the new property as their main residence.

In other words, unless an individual is replacing their main residence the higher rates of Stamp Duty Land Tax (SDLT) will apply.

Those who have followed the recent tax changes will remember that last year Stamp Duty Land Tax rates were lowered. Whereas previously the value of the property determined the rate at which the whole price was assessed for tax purposes, this system was replaced with one which mirrors the taxation of income.  As it now stands tax is only payable on the band which falls into the relevant taxation bracket.  The table below shows the new position which is based on that system together with the new rates for each slice of property value:

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 new changes will result in the requirement for complex assessments of the tax position prior to the purchase of a property and it would not be possible to explain them all in this short article. However, I would highlight some of the changes and their consequences as follows:

  • If the additional rate is applicable, there is no minimum threshold before tax becomes payable – tax will be payable on all values up to £125,000 at 3%.
  • Keeping an existing property to let out is not a good idea if you are purchasing a more expensive one.  The reason for this is that you will be assessed for 3% additional tax on the new property and unless you sell your previous home within 36 months you will not be able to reclaim this tax.  An unusual consequence of the new rules is that if you were to sell your original property and buy a new one at an identical price within the 36 month period then you would reduce your tax bill by 3% of the difference between the value of the two new properties.
  • Married couples and civil partners will be treated as a unit.  If either of them own more than one residential property at the date of completion of the purchase of another property they will be subject to the additional 3% tax rate regardless of whose ownership that property is registered in.  This will not apply if they are living separately in circumstances that are likely to become permanent although we would recommend separation is documented:
    • Under a Court Order or
    • By a formal Deed of Separation executed under seal.

We would recommend that you take legal advice at the earliest possible opportunity if you are unsure about the future of your marriage or civil partnership so that you can assess the likely tax consequences of any particular decision.

  • For joint purchasers the rule is much the same.  If either of the purchasers own another residential property at completion then the additional rate of tax will be payable.
  • If a property is bought in a Partnership then the Partners will be treated as joint purchasers of the partnership property and if any of them own another property at the date of completion then the additional tax will be payable.
  • If you inherit 50% or lesser share of a property within 36 months prior to a purchase transaction you will not be considered to be purchasing an additional property.
  • If purchasing a property for a child you will need to be particularly careful.  If the property is registered legally in the name of the parents (whether with the child or alone) and they own an additional property then the higher rate of tax will be payable.
  • If the purchase property replaces the main residence and that is sold within 36 months then the tax will be reclaimable.  There may be complications in deciding whether you have replaced your main residence and HMRC will look at things such as where the individual and family spends their time, if they have children where they go to school, where the purchaser is registered to vote, where they work as well as other factors in deciding this.  Unfortunately the new rules lack clarity and guidance is limited.
  • It is likely that purchasers will need a Solicitor to assist them in completing Stamp Duty Land Tax Returns upon their purchase and in ascertaining whether or not the additional rate of tax will be applicable to them.  If they go on to sell a former main residence within 36 months they may also need assistance in completing another return to HMRC to reclaim the tax initially paid.
  • The tax will apply equally to furnished holiday lets as well as buy-to-let purchases and second homes.  It will not apply to caravans, mobile homes or house boat purchases and neither will it apply to commercial property, agricultural land, forests or mixed use property ie: a mix of residential and non-residential parts to the building.  The exemption will also apply to property that is purchased as commercial property even if it is later converted into residential property which may benefit from permitted development rights.
  • Six or more residential properties purchased in a single transaction are treated as non-residential and therefore will not attract the new tax.  The proposed exemption for Companies or investors who have or would intend to purchase more than 15 properties was not carried through in the Budget.
  • Treatment of Trusts is complicated but some beneficiaries (presumably owning a 50% or greater interest in residential properties) will be treated as owning a property so if they purchase another property that will be subject to the additional rate of tax.  This may be of concern to those who are beneficiaries acquiring a life interest or right of occupation for life in someone’s Will.
  • It is not clear what “ownership” of property means.  In previous changes to Stamp Duty Land Tax HMRC have defined this by reference to the term “major interests” in land which would not necessarily have referred to a beneficial ownership, but the precise detail of how it will be viewed is not clear.

The Law Society and Council of Mortgage Lenders put forward representations that the tax could be simplified by reducing it to a single stage test; asking the question “Will I live in the property that I am buying as my main residence from completion?”.  However, this test is unlikely to catch the same number of transactions and would be easier to avoid than the regime which the Government has introduced.

These rules may not represent what most of us considered the new tax would be – it has been widely reported as a “buy-to-let” tax but it is considerably further reaching than that.

It seems that this is an end to the “live and let buy” generation and it remains to be seen what effects these complicated and far reaching tax changes will have on the property market as a whole.

Full guidance is yet to be provided by HMRC and whilst every effort has been made to ensure accuracy of the information contained in this article on the date it was written, it does not substitute the need for independent legal or financial advice in respect of your specific circumstances and is not intended to be relied upon.

Adam Corcoran, Director