SDLT additional rate for residential properties – limited good news for individuals but bad news for property investors

Wed 16 Mar 2016

The government has now finalised its proposals for the introduction of a 3% surcharge for purchases of additional homes and buy-to-let properties by individuals and for any purchase of a dwelling by a company or other non-natural person.

However, there is unwelcome news in that the proposed exemption for large scale investors will no longer be introduced leaving investors of any size paying the higher rates for purchases on or after 1 April 2016.

In last year’s Autumn Statement the Chancellor announced that from 1 April 2016, purchases of additional homes and buy-to-let properties costing more than £40,000 would be subject to higher rates as part of the Government’s plans to support home ownership and first-time buyers.

The higher rates will be 3 percentage points above the current SDLT rates:

For purchases by individuals, the surcharge will apply to any purchase which completes on or after 1 April 2016 (unless contracts were exchanged on or before 25 November 2015) where, after the purchase, the individual has an interest, including a joint interest, in two or more residential properties unless the property being purchased is to replace the main residence of the purchaser and their previous main residence is sold no more than 3 years before the purchase of the new residence.  If the old main residence is retained, eg as a holiday home or let out, the purchase of the new main residence will remain subject to the higher rates.

Where there is a delay in selling the old main residence, while the additional rate will still be payable on the purchase of the new main residence a refund can be claimed if the old property is sold within 3 years of the purchase of the new one.  This 3 year period is a welcome extension from the original proposal of 18 months but still leaves the burden of funding the additional charge until the old property is sold and a refund can be claimed.

The Government has also announced that in counting the number of residential properties in which an individual has an interest for the purposes of determining whether the additional rate applies, a small share (50% or less) in a single residential property which has been inherited within the last 3 years will not be taken into account.  This is to address concerns about individuals being subject to the additional charge where they inherited a small share in a property whilst in the middle of purchasing a new main residence.

Although, for individuals, the higher rates only apply to purchases of additional properties, as the government was concerned about the use by individuals of companies and other special purpose vehicles to avoid the higher rates, they will apply to all purchases of residential property, including the first, by companies and other non-natural persons.

The unwelcome news was reserved for property investors who still appear to be out of favour.

When the proposals for the surcharge were originally announced the Government was minded to introduce a relief for large scale investors as it was considered that such purchasers would positively contribute to an overall increase in housing supply through helping to facilitate the development and quality of the housing stock.  However, concerns were expressed in the consultation process about such a relief unfairly benefiting large investors over smaller ones and as the Government was not convinced that there would be an adverse and material effect on housing supply in the absence of such a relief it has now decided not to introduce any relief.

This introduces a significant difference for investors purchasing property in England and Wales, where no relief from the surcharge will be available, and those purchasing residential property in Scotland, where the surcharge will not apply to purchases of six of more such properties in a single transaction.  It remains to be seen what approach the Welsh Assembly will take when SDLT is devolved to Wales on 1 April 2018.

The Government expects around 10% of residential property transactions to be affected and expects to raise around £3.7 billion over the next 5 years.

Update

Having reviewed the draft legislation in detail it appears that as it stands the higher rates will not apply to any single transaction involving six or more residential properties, which would be subject to the lower non-residential rates.  This would mirror the approach in Scotland.  However, it is not clear whether this is an oversight in the drafting which fails to dis-apply the provision that treats six or more dwellings purchased in a single transaction as being non-residential property given that one proposal for the now abandoned relief for large scale investors was for the block purchase of 15 or more residential properties and that there no specific mention was made in any of the Budget documentation regarding purchases of six or more dwellings in a single transaction being excluded from the higher rates. 

Author: James Summers