The condoc on higher SDLT rates

In the 2015 Autumn Statement, the government announced a five point plan for housing with the intention of refocusing support for housing towards low cost home ownership for first time buyers. The fifth point on that plan is to ‘charge higher rates of SDLT on purchases of additional residential properties, such as buy-to-let properties and second homes, from 1 April 2016’. It is proposed that this additional rate of SDLT will apply to most purchases of additional residential properties in England, Wales and Northern Ireland and to acquisitions by companies and other vehicles.

 

What is the impact on rates and when will they apply?

 

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Property value                   Basic SDLT          New SDLT rate on additional properties

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£0–£125,000                       0%                       3% (unless transaction is below £40,000)

£125,000–£250,000            2%                        5%

£250,000–£925,000            5%                        8%

£925,000–£1.5m                10%                      13%

Over £1.5m                        12%                      15%

 

The higher rate will apply to purchases completed on or after 1 April 2016 unless the exchange took place prior to 26 November 2015.

 

How to determine whether the new higher rate will apply

 

The higher rate will not apply on the purchase of a residential property, irrespective of whether that property is to be used as a buy-to-let or as a main residence, where an individual does not own any other property. Where the individual owns other residential properties, the purchase of an additional property will attract the higher rate unless it is the replacement of a main residence. Other properties include overseas properties.

 

How will the proposed relief for the replacement of a main residence work?

 

The consultation states that where a main residence is being replaced, the higher rates should not apply. If a purchaser has sold a previous main residence in the past 18 months and the purchase is a new main residence, the higher rates will not apply. However, where the sale of the old property occurs within the 18 month period following the acquisition of the new property, the individual will have to pay the higher rate of SDLT and claim a refund.

 

How will a main residence be determined?

 

The main residence will be determined as a question of fact and the consultation lists some factors that HMRC will take into account. These are similar to those for capital gains tax principal private residence relief. There will be no facility to make an election.

 

What are the proposals for joint owners?

 

A couple who are married or in a civil partnership will only be entitled to one main residence between them. If either partner owns a property before acquiring a main residence, then the acquisition of the main residence will be subject to the higher SDLT rates. 

 

Where a couple separate, they will continue to be treated as a couple until they are separated under a court order or by a formal deed of separation. This is different to the existing capital gains tax rules, which treat a couple as separate individuals in the tax year following separation. Yet another variant on the meaning of a couple for tax purposes is unhelpful; and this will bring separating couples into the higher SDLT charge where another residence is being acquired during the separation process.

 

Where parents acquire a property jointly with an adult child, the higher rate will be payable on that property acquisition. Parents will need to rethink how such a property will be acquired in the future.

 

What about properties in a trust?

 

It is proposed that a beneficiary with an interest in possession or a life interest in a property owned by a trust will be treated as owning that property for the purposes of the new SDLT rates. This means that the beneficiary will have to pay the higher rate of SDLT on the acquisition of a residential property. Also, the trust will be liable to the higher rate of SDLT on the acquisition of another residential property. Purchases by trustees, where beneficiaries have no interest in possession over the property, will be liable to the higher rates.

 

What about property investment businesses?

 

For large scale investors, the government is seeking views on whether any proposed relief should be available to all types of property investors; and whether an existing property ownership or bulk purchase test of 15 properties is appropriate. It is not clear why 15 has been selected. Also, the proposal is that the ‘bulk acquisition’ test is 15 property acquisitions in one transaction, which suggests that they must be on the same sale and purchase agreement, not linked transactions. This remains to be clarified. It is expected that draft legislation will be released on 16 March 2016 as part of the Budget, but given that some of this consultation is seeking evidence it is difficult to see how the legislation will address many of the issues. 

 

Any further points to watch?

 

Clients that are contemplating the purchase of an additional property, or that are in the process of purchase, will be subject to the higher rates if completion does not take place before 1 April 2016. Although we are still at the consultation stage, advisers should be alerting both private clients and property investors to these proposed changes. Where advisers have clients that will be adversely affected by the changes, they should be responding to the consultation.