Are you buying a residential property? On the day you complete the purchase, will you or your spouse own another residential property anywhere else in the world which is not being replaced with this purchase? If the answers to these questions are yes then you need to start paying attention.
In the 2015 Autumn Statement the Chancellor announced higher rates of SDLT for purchases of additional residential properties, such as second homes, investments and buy-to-lets.
The proposed new rules will apply to purchases of additional residential property which complete on or after 1 April 2016 unless contracts were exchanged on or before 25 November 2015 (provided that the contract has not been amended or varied from the form it was in at the point of exchange). If contracts are exchanged after 25 November 2015 then the higher rates will apply if the purchase is completed on or after 1 April 2016.
The new rates
The higher rates will be 3% above the current SDLT rates (at each band level), payable on the total price paid for the property. The higher rates will not affect transactions with a purchase price of up to £40,000 (where an SDLT return is not required). A table below sets out the old and the new rates:
|Band||Existing residential SDLT rates||New additional SDLT rates|
|£0* – £125k||0%||3%|
|£125k – £250k||2%||5%|
|£250k – £925k||5%||8%|
|£925k – £1.5m||10%||13%|
*Transactions under £40,000 do not require a tax return to be filed with HMRC and are not subject to the higher rates
For example, a purchase of a second property for £650,000 would see the SDLT rise from £22,500 to £42,000.
The aim of the Government is to try and reduce the demand for second homes to free-up more properties for first-time buyers while applying some of the anticipated additional tax to assist communities and provide affordable housing.
Individuals and corporates
The higher rates will apply to both foreign and domestic purchasers of additional residential properties where at the end of the transaction the individual purchaser owns two or more residential properties and are not replacing their main residence. For companies, only one residential property needs to be purchased.
If a person purchases a new main residence before having sold their current main residence, then the higher rates will apply to the new purchase but if the former main residence is then sold within 18 months of the transaction, the person may claim a refund of the higher rate. However, if a person owns a buy-to-let property and then buys a new residential property, the higher rate will still apply as that person is not replacing their main residence. Residential property owned anywhere in the world is taken into account – not just residential property in the UK.
The rules will apply to joint purchasers and married couples so that if at the end of a transaction any of the purchasers has two or more residential properties and is not replacing their main residence then the higher rates will apply to the entire consideration for the transaction.
The current position is that a corporate (or other “non-natural person”) generally pays 15% SDLT on residential purchases where the purchase price exceeds £500,000. This is subject to various exemptions for developers and those running a rental business. For properties costing more than £500,000, SDLT at the rate of 15% is charged on the whole of the purchase price and the tier system doesn’t apply. It is not yet clear from the consultation whether the 15% rate will also be subject to the additional 3% duty, resulting in a top rate of 18%.
What is a main residence?
There is no hard and fast rule on what a main residence is and the Government will take a number of factors into account when deciding if a property is a main residence. These will include:
The definitions of residential property and non-residential property will not change. This means that the higher rate will not apply to a non-residential property, even if it is later converted to residential use. Additionally, the higher rates will not apply to purchases of mixed use property.
The higher rates of SDLT are intended to apply to the vast majority of circumstances where individuals or companies and other non-natural persons purchase (additional) properties, thus causing a displacement of first-time buyers.
What about multiple dwellings relief?
Where multiple residential properties are purchased in a single or linked transaction, that transaction is eligible for multiple dwellings relief (MDR). Under MDR, the residential rates of SDLT are applied to the average price of each property (multiplied by the number of properties purchased) rather than applying to the entire transaction value. This brings the total SDLT due closer to the amount that would be due if the same properties had been purchased separately. Where six or more residential properties are bought together, the purchaser can choose whether to apply the non-residential rates of SDLT (to the entire transaction value – current top rate of 4% on the entire purchase price) or to choose the residential rates of SDLT with MDR applied. It may be more beneficial to apply the non-residential rates going forward.
If you have any doubts or questions regarding the changes then please do get in contact with us.
For further information, please contact:
Amanda Hado-Bodfield, Partner, Fladgate LLP (email@example.com)