3% higher SDLT on additional residential property will not be restricted to individuals

Fri 08 Jan 2016

The way the new higher rate of SDLT on “additional residential properties” will operate has been outlined in a Consultation Document which details the Government’s proposals. The consultation runs until 1 February 2016 and is intended to lead to the final details of how the new rate will apply being set out in the Budget on 16 March.

The SDLT residential property rate bands from 1 April 2016 will be as follows.

* Properties costing £40k or less will not be subject to the additional charge but for properties costing over £40k the additional 3% will apply to the entire first £125k slice of consideration.

The main focus of the original announcement was on individuals’ buy-to-let properties and second homes. Those are properties most likely to be affected but the new rate will have much wider application and will be payable on acquisitions by:

·         individuals;

• married couples and civil partnerships;
• trusts;
• partnerships; and
• companies.

The higher rate will apply to all residential properties and interests in residential properties where completion takes place on or after 1 April 2016 except where:

·         contracts were exchanged on or before 25 November 2015;

·         the property is the only residential property owned by the purchasing individual (or the individual’s spouse or civil partner);

·         the property replaces the purchasing individual’s previous main residence that was sold in the 18 months preceding the purchase;

·         the purchaser is exempt from SDLT as a charity or registered social landlord (RSL); or

·         the purchaser is a company that qualifies for exemption from the higher rate as a large-scale investor (LSI)- LSIs will still be subject to normal SDLT rates (the Government has not definitely decided to introduce this exemption – or finalised the definition of a LSI – but it is in the condoc and must be regarded as likely).

Residential property

The same definition of residential property applies as for other SDLT purposes and depends on whether the property is classified as a dwelling suitable for human habitation, i.e. potentially liable for council tax.

The definition is wider than for other taxes and takes in all forms of residential property, including furnished holiday lettings.

The only forms of asset that might be regarded as dwellings but are not included are timeshares where the timeshare itself is not subject to the standard SDLT and movable homes such as caravans, houseboats and mobile homes.

Non-residential properties

Specifically excluded from the description of residential property are:

·         commercial property (such as shops or offices);

·         agricultural land;

·         bare land (even where that land may subsequently be used for residential purposes);

·         forests;

·         any other land or property which is not used as a residence;

·         6 or more residential properties bought in a single transaction (multiple residential property purchases- see below); and

·         mixed use property (i.e. property with both residential and non-residential elements).

Possible exemption for large-scale investors (LSIs)

The general SDLT rule treating multiple (six or more together) residential property purchases as commercial properties  also applies for higher rate purposes too. For bulk purchasers (of six or more residential properties):

·         the default option is to pay commercial property rates on the entire transaction as if it related to a single property; or

·         claim multiple dwelling relief (MDR) and work out the rate applicable to the average value of all the residential properties bought in the one transaction (or the series of connected transactions), thereby charging that rate on the whole transaction.

If MDR is claimed on a transaction on or after 1 April 2016 the average rate will include higher rate and will significantly reduce the benefit of claiming MDR over paying commercial rates and in some cases will now make the default option of paying commercial rates more attractive.

The Government is also considering an exemption from the higher rate for large-scale investors (LSIs)- investors who own or acquire enough residential properties in bulk to stimulate the market in new properties or conversions from non-residential to residential use. The proposals require further consideration, consultation and development but the suggestion is that an LSI would be defined as an investor acquiring 15 or more properties in a single transaction; or possibly an investor who already owns at least 15 residential properties and acquires more.  The Government has not decided whether the exemption should be extended to cover individual investors as well as corporates and other non natural persons.

Such investors at present qualify for the MDR relief but they might instead enjoy the benefit of outright exemption from higher rates to stimulate the development of new housing.

The additional property requirement for individuals

No individual will be required to pay higher rate SDLT on a dwelling that is the only residential property that they own, whether it is their main residence or not and including if they live in job-related accommodation and buy one investment or FHL property. The rule is to be that where a person acquires a new residential property and, at midnight on the day of purchase they also own any other residential property, they are liable for the higher rate unless the main residence exemption applies (see below). 

Residential properties worth less than £40,000 can be ignored when considering the number of residential properties held. 

An individual who does not own any residential property will not be subject to higher rate SDLT when they buy their first property regardless of how they intend to use it; this is so even if they already rent a residence of any value.

An individual who owns any residential property anywhere (not just in England, Wales or Northern Ireland- remember that Scotland has its own separate Land and Buildings Transaction Tax “LBTT”) and then acquires a second residential property in England, Wales or Northern Ireland will pay the higher rate if the property’s value exceeds £40k.  The Scottish Government has indicated that it will also introduce a similar 3% LBTT supplement for purchases of additional residential property (with a value in excess of £40k) in Scotland.

Main residence exemption

This is intended to ensure that an individual’s main residence should never be subject to higher rate  SDLT but the proposal is flawed in that the exemption as proposed will only apply to a property that replaces another that was their main residence.

So if for example a member of the armed forces who lives on a military base and owns a holiday cottage, that she rents out as furnished holiday letting, buys a house with the intention of making that house her main residence in retirement, higher rate  SDLT will be payable on the new main residence because she already has a property and is not replacing her main residence.

The main residence exemption will apply where the old residence is disposed of in the three year period beginning 18 months before the new property is bought and ending 18 months after the new purchase.

·         If the old residence has been sold exemption will be claimable on the SDLT return relating to the new property.

·         If the old property is sold afterwards higher rate SDLT will be payable along with normal SDLT and will need to be claimed back as a refund (although the Government is considering allowing the normal rates to still apply provided the old property has been sold by the time the SDLT return is filed).

This will be important to anyone who sells their main home and owns a holiday home as well. Without the exemption the purchase of the replacement residence will incur the higher rate SDLT.

Multiple residences

Where an individual owns more than one residence, which is the main residence will be a question of fact, including the owner’s intention. Factors taken into account will include:

·         where the individual and family spend their time;

·         if the individual has children, where they go to school;

·         at which residence the individual is registered to vote;

·         where the individual works;

·         the location and degree of furnishing and location of moveable possessions; and

·         the correspondence and registration addresses used by the individual.

Intention is likely to come into play most often where the buyer acquires a house as residence but subsequently starts using it for a different purpose, e.g. letting, while owning another property. It will also be relevant where the owner divides his time and use of the property equally between two properties. The major source of disputes is likely to be about the status of the property sold than the replacement property but problems might arise where the disposals form part of a lifestyle change. If a partner in an urban firm decides to move to a place in the country where he has a holiday home, he may well want to downsize his city residence. If he sells his city house and replaces it with a small flat for occasional use when visiting for business or social purposes his main residence is likely to transfer to the existing holiday home that he already owns, making the newly purchased flat his second home and subject to higher rate SDLT.

No main residence elections

It will not be possible for an individual to make an election for any property to be regarded as their main residence: that is to be settled solely on the basis of the facts, in the same way as for the CGT PPR relief where no election has been made.

Higher rate  SDLT will be similar to CGT also in that a lot will turn on the intention of the purchaser: a person who sells their main residence and buys a house with the intention of making it their main residence will qualify for the main residence exemption.

A house bought on or after 1 April 2016 that replaces a former main residence disposed of before that date but within the preceding 18 months should qualify for the exemption.

Joint purchasers beware!

Example 19 in the consultation document highlights a possible unfairness in the proposals that the Government is aware of. If two people, one of whom already owns a property whilst the other does not, jointly purchase a new residential property that purchase will incur the higher rate of SDLT on the whole value, not just the share of the purchaser who has another property. This will still be so even if the other purchaser, the one with no other property, intends to reside in the house.

Partnerships- partners regarded as joint purchasers

Where a partnership buys a property that purchase will be treated as made by all the partners jointly, therefore the new property only needs to be a second property for one partner for the entire purchase to be taxable at the higher rate.

Married couples and civil partners

These couples are treated as single units for higher rate SDLT purposes, so it does not matter if the couple’s main residence is owned jointly or is in one spouse’s sole name; if either of them acquires another residential property the additional rate applies.

For higher rate SDLT purposes any married couple or civil partners are to be treated as a unit unless they are formally separated or no longer living together in circumstances such that the separation is likely to be permanent, i.e. the same test as for income tax and CGT.

A trap for separated couples

As set out in the consultation document the higher rate SDLT rules could, unless they are changed following consultation, penalise separated spouses who, as is not uncommon, retain an interest in the former matrimonial home because such a person would be regarded as having two properties (remember that owning an interest in a property counts as owning a property) when he bought a new home to live in.

Trusts

Trustees acquiring residential property will be subject to higher rate SDLT as follows:

·         property held on interest in possession will be treated as the property of the beneficiary with that interest;

·         higher rate  SDLT will apply to all property purchased by trustees where there is no interest in possession in the property; and

·         property purchased on bare trust will be treated as the property of the beneficiary on whose behalf it is held;.

The clear intention is that trusts should not be used as a way of avoiding the higher rate.

Interest in possession trusts

Where a trust holds or acquires residential property for the benefit of a beneficiary with an interest in possession (IIP) the property will treated as owned by the beneficiary for the purposes of higher rate SDLT. This offers the advantage that if the beneficiary does not already own any other residential property the exemption for individuals should apply in the same way as if the beneficiary had bought the property personally.

This also means that any properties owned by the beneficiary’s spouse or civil partner will need to be taken into account too and if more than one beneficiary has an IIP in the property the exemption is lost if any of them has another residential property.

Whether there will be planning opportunities for trustees to purchase property to be held on IIP for minors whose parents already own other properties remains to be seen as the consultation document does not mention anti-avoidance provisions because it is concerned with the general structure of the increased charge. However, SDLT is already subject to Disclosure of Tax Avoidance Schemes (DoTAS), high risk promoter rules, accelerated payment notices and follower notices and the general anti-abuse rule (GAAR). It is therefore possible that the Government will decide that specific anti-avoidance provision will not be required but that would not be a reliable assumption.

Trusts without interest in possession

Such trusts would include 18-25 trusts and the Government’s broad approach is understandable: it would be too easy for property to be settled on a discretionary trust and then made available to family members. The costs, in particular of IHT on settlement if the property was substantial, would make this an unattractive option for setting up as a property-owning vehicle but it would otherwise have been an easy SDLT-saving device for established trusts and for those planning to create trusts through wills.

Bare trusts

Bare trusts do not present any issues because they offer virtually no options for planning in other areas of tax. There might conceivably be some narrow, theoretical scope for using bare trusts funded by parents or grandparents, in particular by will, to receive cash which would then be applied to acquire a property for a bare beneficiary, e.g. a minor child. However, this sort of arrangement would be vulnerable to the practical problem that a bare beneficiary would, at least on reaching majority, be able to call on the trustees to liquidate the trust and appoint the assets to him.

That would appear to be pointless because the same SDLT result could be achieved by using an interest in possession trust for the minor beneficiary, with the protection of trust terms restricting appointment of property.

In any case, unless the intention was to use the trust to hold a very high value property the costs would usually outweigh he SDLT saving.

Companies and collective investments

The general rule will be that companies are liable to higher rate  SDLT on all purchases of residential property and companies will not be exempt on the first property purchased.

Companies that are charities or RSLs will be exempt.

Shared ownership schemes

The present proposals contain no dispensation for properties where the freehold or headlease is held by a company set up by the occupiers of individual dwellings to act as landlord/service company. These will not be common and alternative arrangements such as commonhold may be available. The amounts involved may not be significant where individual owners buy their leaseholds separately and only the reversions are put into the landlord/management company.

It is possible that an exemption may be made for such cases as the consultation document includes (Q.17) an invitation for specific kinds of companies to be treated equally with individuals and so not automatically subject to the higher rate.

Returns and refunds

The SDLT return forms, usually completed by the conveyancer, will be amended to take account of the new higher rate.

The system will also need to be changed to take account of the increased number of claims for refunds that will arise where main residences are replaced and the old residence is not sold until after the new one has been acquired. HMRC are considering linking the refund system to the return system but details have not been provided. There is scope for complication here because the refund will become available when the old residence is sold and the return for that will be made by or on behalf of the purchaser of the old property, not the vendor who will be claiming a refund of SDLT paid on a separate return that they have already made. How this will work and how data protection issues will be managed remain to be seen.