Successive increases in the ‘standard’ rates have meant that the intentionally punitive SDLT anti-enveloping rate needs to be reviewed.
The stamp duty land tax (SDLT) ‘higher rate for certain residential transactions’ (not to be confused with the SDLT ‘higher rates for additional dwellings and dwellings purchased by companies’) was introduced in 2012. The rate, 15% of the purchase price and referred to here as the ‘super rate’, is one of two remaining SDLT slab rates. (Full marks to those that can identify the other.) It is meant to deter individuals from using shell companies to buy residential property for occupation – so-called ‘enveloping’. Starting two years after its introduction its deterrence effect has been progressively eroded by successive rate increases (and by significant changes to inheritance tax made last year).
The rate originally had a tremendous bite. It was three times the then highest SDLT rate for residential property transactions. This invited comments that it was a ‘season ticket’. Multiples of tax are collected when the property is bought by the company as a prepayment of the tax on transfer that would not be charged if/when the shares in the property-owning company were sold. This would mimic the 1.5% higher stamp duty and stamp duty reserve tax rates for transfers of shares to providers of depositary receipts or clearance services. But unlike shares held in a depositary receipt program or clearance service, a loss of tax on future sales of the property is not certain. The property might be sold directly, rather than indirectly by a sale of the property-owning company. So, I think astonishingly, the super rate punishes a person for something he might do rather than for something he has done.
If there were a practice of enveloping residential property for SDLT avoidance, then surely it would be specific to super-prime property. Although the rate applies to dwellings worth £500,000, it is unrealistic to think that dwellings would be sold via companies for dwellings anywhere near this price bracket. On the purchase of a £20m dwelling (not a main residence), the extra amount of tax payable in accordance with the super rate as a proportion of the amount of tax that would be payable but for the rate has fallen from 114% to just 3%. Moreover, the increases in the ‘standard’ rates positively encourage enveloping: the season ticket has become cheap. So the super rate is ripe for review. The options available to the government, so far as I can see, are:
increase the rate to make the season ticket expensive;
repeal the rate recognising that enveloping was driven by inheritance tax, not SDLT, and that has since ceased;
repeal the rate and instead increase the cost of maintaining an envelope (annual tax on enveloped dwellings); or
repeal the rate and ATED, and instead introduce an indirect charge on sales of residential property holding companies (NB land and buildings transaction tax provides for such a charge).
The proposal for overseas investors to pay CGT on disposals of land-rich companies hints at the possibility of an indirect SDLT charge. However, the commitment made by the government at the last Budget not to resume imposing the stamp duty and SDRT 1.5% charges on issues and certain transfers of shares to providers of clearance and depositary receipt services post Brexit does not. What is certain is that the SDLT super rate needs to be reviewed.
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What will become of the SDLT super rate?
Successive increases in the ‘standard’ rates have meant that the intentionally punitive SDLT anti-enveloping rate needs to be reviewed.
The stamp duty land tax (SDLT) ‘higher rate for certain residential transactions’ (not to be confused with the SDLT ‘higher rates for additional dwellings and dwellings purchased by companies’) was introduced in 2012. The rate, 15% of the purchase price and referred to here as the ‘super rate’, is one of two remaining SDLT slab rates. (Full marks to those that can identify the other.) It is meant to deter individuals from using shell companies to buy residential property for occupation – so-called ‘enveloping’. Starting two years after its introduction its deterrence effect has been progressively eroded by successive rate increases (and by significant changes to inheritance tax made last year).
The rate originally had a tremendous bite. It was three times the then highest SDLT rate for residential property transactions. This invited comments that it was a ‘season ticket’. Multiples of tax are collected when the property is bought by the company as a prepayment of the tax on transfer that would not be charged if/when the shares in the property-owning company were sold. This would mimic the 1.5% higher stamp duty and stamp duty reserve tax rates for transfers of shares to providers of depositary receipts or clearance services. But unlike shares held in a depositary receipt program or clearance service, a loss of tax on future sales of the property is not certain. The property might be sold directly, rather than indirectly by a sale of the property-owning company. So, I think astonishingly, the super rate punishes a person for something he might do rather than for something he has done.
If there were a practice of enveloping residential property for SDLT avoidance, then surely it would be specific to super-prime property. Although the rate applies to dwellings worth £500,000, it is unrealistic to think that dwellings would be sold via companies for dwellings anywhere near this price bracket. On the purchase of a £20m dwelling (not a main residence), the extra amount of tax payable in accordance with the super rate as a proportion of the amount of tax that would be payable but for the rate has fallen from 114% to just 3%. Moreover, the increases in the ‘standard’ rates positively encourage enveloping: the season ticket has become cheap. So the super rate is ripe for review. The options available to the government, so far as I can see, are:
increase the rate to make the season ticket expensive;
repeal the rate recognising that enveloping was driven by inheritance tax, not SDLT, and that has since ceased;
repeal the rate and instead increase the cost of maintaining an envelope (annual tax on enveloped dwellings); or
repeal the rate and ATED, and instead introduce an indirect charge on sales of residential property holding companies (NB land and buildings transaction tax provides for such a charge).
The proposal for overseas investors to pay CGT on disposals of land-rich companies hints at the possibility of an indirect SDLT charge. However, the commitment made by the government at the last Budget not to resume imposing the stamp duty and SDRT 1.5% charges on issues and certain transfers of shares to providers of clearance and depositary receipt services post Brexit does not. What is certain is that the SDLT super rate needs to be reviewed.
