SDLT on commercial and mixed property transactions


Author: John Forde


Significant changes to the SDLT treatment of non-residential property (commercial and mixed property) were announced in the Budget on 16 March 2016.

Freehold transactions, lease premiums and assigned leases

On or after 17 March 2016, the SDLT rate for non-residential freehold transactions, lease premiums and assigned leases will be based on the portion of the consideration that falls within each band (rather than SDLT being calculated at single rate on the entire value).

This move from a “slab” to a “slice” system echoes the reforms for residential property that were announced in the 2014 Autumn Statement.

New rates and bands have also been introduced.

The new rates are:

Chargeable consideration   Rate   
£0 – £150,000 0%
£150,001 – £250,000 2%
£250,000 + 5%

 

The new rules result in a modest decrease in SDLT on any purchases with a value up to £1.05 million. However, any transaction with a chargeable consideration in excess of £1.05 million will suffer an increase in SDLT.

Rent on new non-residential leases 

SDLT on the rental element of a lease is calculated by reference to the net present value (NPV) of the lease. The calculation of the NPV is complex but in essence it reflects the aggregate of all the rents payable during the term of the lease discounted slightly for the time value of money.

Prior to 17 March 2016 the SDLT on the rent element of a non-residential lease was charged at 0% on the first £150,000 of the NPV and 1% on the portion above this.

However, from 17 March 2016 the Budget has introduced a new 2% rate on any part of the NPV that exceeds £5 million.

The new rates bands and thresholds for rent paid under a non-residential lease are:

Net present value of rent    Rate   
£0 – £150,000 0%
£150,001 – £5,000,000 1%
£5,000,000 + 2%

 

Transitional rules

There are transitional rules for the changes to the non-residential SDLT regimes. If contracts were exchanged before 17 March 2016, but the contract is completed on or after that date, taxpayers can choose to pay SDLT under the old rules if that would produce a better result.

However, the transitional rules cannot apply where the contract in question has been varied or assigned etc. in the interim.

HMRC guidance 

HMRC has published detailed guidance (including FAQs) in relation to the new rules that can be found here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508289/
16_03_2016_Main_Guidance_Non_Res.pdf

The HMRC online calculator has also been updated already and can be found here: https://www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#/intro 

Residential SDLT

The Budget also confirmed the details of the 3% surcharge that will apply to certain purchases of additional residential property (such as second homes and buy-to-let properties).

In summary the surcharge will affect:

  • Individuals purchasing a residential property who, at the end of the day of the transaction, own two or more residential properties and are not replacing their main residence.
  • Companies purchasing residential property. Even the first purchase of a residential property by a company will potentially be subject to the additional 3%.
  • Other classes of purchaser, such as trusts and partnerships, which are subject to their own specific rules.

Where the provisions apply they will increase the rates of SDLT in each band by 3%:

Band Existing residential SDLT rates (rate paid on portion of price in each band) New higher SDLT rates that apply to certain residential purchases (rate paid on portion of price in each band)
Up to £125,000 0% 3% (except for properties costing less than £40,000 where the rate will remain 0%)
£125,000 to £250,000 2% 5%
£250,000 to £925,000 5% 8%
£925,000 to £1,500,000 10% 13%
£1,500,000 12% 15%

 

The new rates will apply to purchases completed on or after 1 April 2016.

However, they will not apply if the purchaser completes a contract that was exchanged on or before 25 November 2015 (provided the contract in question has not been varied or assigned etc. in the interim).

Individuals

The higher rates will not apply if, at the end of the day of the purchase, an individual owns only one residential dwelling. This is the case regardless of whether the new acquisition was intended as a replacement residence or as an investment.

However, if an individual owns two or more residential properties at the end of the day of purchase then the position will depend on whether he is replacing his main residence or not:

  • If the individual has sold his previous main residence in the preceding three years, and the transaction is a purchase of a new main residence, the higher rates of SDLT will not apply.
  • However,, if the individual is not replacing a main residence (either because he has not sold a main residence or the property just acquired is not a new main residence), then the higher rates will apply.

It is recognised that it will not always be possible to sell an existing main residence before acquiring a new one. Therefore the draft legislation offers a measure of relief in these circumstances. If a new main residence is acquired before it has been possible to sell the previous one, then the individual is required to pay the extra 3% in the first instance, but can later reclaim it provided he proceeds to sell his previous main residence within three years.

In assessing whether an individual has more than one residential property at the end of the day on which a new residential property is acquired:

  • residential properties anywhere in the world are taken into account;
  • leasehold interests can be ignored if the lease was originally granted for a period of seven years or less;
  • interests in dwellings where the interest has a market value of less than £40,000, and reversionary interests subject to a lease of more than 21 years, can be ignored;
  • properties acquired as a result of inheritance can be ignored if acquired within the last three years and the individual’s share in the property does not exceed 50%;
  • joint interests in other dwellings, properties owned by an individual’s minor children, and any properties owned by the individual’s spouse or civil partner (unless separated from the spouse or civil partner in circumstances where the separation is likely to be permanent), are all taken into account.

Companies, other types of purchaser, and miscellaneous

Even the first purchase of a residential property by a company will potentially be subject to the additional 3% provided the consideration is in excess of £40,000 and the property is not subject to a lease of more than 21 years.

The treatment of trust purchases depends on the nature of the trust. A purchase by the trustee of a discretionary trust will always be subject to the additional rates (provided the consideration is in excess of £40,000 and the property is not subject to a lease of more than 21 years). A purchase by the trustee of a bare trust, or an interest in possession trust, on the other hand will be treated as a purchase by the beneficiary and whether the higher rates will apply will depend on the beneficiary’s personal position.

Specific provisions apply to determine the treatment of partnership acquisitions and acquisitions by partners.

It seems that when six or more dwellings are acquired in a single transaction the purchaser will still be able to choose to apply the commercial rates of SDLT rather than the residential rates. Alternatively, a purchaser of multiple dwellings would have the option to claim “multiple dwellings relief”.

HMRC guidance

HMRC has published detailed guidance (including FAQs) on the purchase of additional residential property that can be found here:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508272/GuidanceNote_Final.pdf

The HMRC online calculator has also been updated and can be found here:
https://www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#/intro

 

John Forde, Partner, Fladgate LLP (jforde@fladgate.com)

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