The Government has now concluded its consultation as to how it will implement the Stamp Duty Land Tax (SDLT) Surcharge announced in the Spending Review and Autumn Statement 2015.
Those replacing their main residence will be pleased to see that the window within which this must take place has been increased from 18 months to 36 months and will commence from 25th
November 2015 for those who sold prior to that date.
However the test will be applied at the end of the day of the relevant transaction rather than when the SDLT return is submitted i.e. if they are purchasing marginally prior to selling.
Large scale investors may be surprised to learn that they will receive no exemption. The consultation floated exclusions for both bulk purchases and purchases by those with an existing portfolio exceeding 15 residential properties. However these exclusions have not been adopted.
Married couples who are living separately in circumstances that are likely to become permanent will not be treated as one unit for the purpose of the higher charge.
Those holding a small share in an inherited property (50% or less) received within 36 months of the relevant residential purchase will be pleased to see it is not to be taken into account.
Those holding restricted use properties such as holiday lodges that cannot be occupied all year
round and property renovators may be disappointed to hear that such properties will be treated in the same way as additional property purchases.
Bare trusts will be looked through as proposed. Purchases and ownership by trustees of trusts with life or income beneficiaries will be tested based on the circumstances of those beneficiaries. All other purchases of additional properties by trusts will be liable at the higher rates.
The higher rate (“the Surcharge”) is to be 3 percentage points above the current SDLT rates taking effect from 1 April 2016 in respect of residential property in England Wales and Northern Ireland only. Transactions under
£40,000.00 do not require a tax return and are not subject to the Surcharge nor will they be counted as a property for the purposes of determining whether the Surcharge applies.
Subject to seeing the detailed rules the net effect is that:-
a. The Surcharge will apply where the purchaser holds two or more residential properties on completion of a given purchase unless they are replacing their main residence.
b. Main residence – this is a question of fact rather than the subject of an election by the tax payer. The following factors will be relevant in determining this:-
• Where the individual and their family spends their time.
• If the individual has children where they go to school.
• At which residence they are registered to vote.
• Where the individual works.
• The location and degree of furnishing and location of movable possessions.
• The correspondence and registration addresses given to various organisations.
A two stage test will apply; firstly whether a property sold within 18 months (forwards or backwards) of the new purchase completing was the only or main residence of the individual and secondly whether the purchaser of the new property intends to occupy it as their main or only residence. The test will be applied at the end of the day of the relevant transaction rather than when the SDLT return is submitted i.e. if they are purchasing marginally prior to selling.
A refund mechanism (of the Surcharge only) is to be created for those who sell their current main residence within 36 months after purchasing the new one. This will commence
from 25th November for those who sold prior to the above review.
c. Transitional arrangements – the higher rates will apply where completion takes place on or after 1 April 2016. They can only be ignored where contracts were exchanged on or before 25 November 2015 but not completed until after that time.
d. Married couples and civil partners – they will be treated as one unit and so another property owned by either partner will be relevant when determining whether the higher charge applies. There will be exclusions for those who are separated under a court order or by a formal deed of separation. Married couples who are living separately in circumstances that are likely to become permanent will not be treated as one unit for the purpose of the higher charge.
e. Joint purchasers – they will be treated as one unit so another property held by one will be relevant. If three people purchase jointly if just one of them already owns a property (and they
are not replacing their main residence) then the Surcharge will apply.
f. Partnerships – partners will be treated as joint purchasers of partnership property and so residential property held by the partnership will be relevant in deciding whether individual partners have more than one property for the purpose of the Surcharge.
g. Purchasing a property for children to live in – where the parents are the sole or joint purchaser then their existing residential property holdings will be relevant.
Only if they provide the cash for their child to purchase in their own name and the parents receive no interest in the property will the parents’ holdings be irrelevant for this purpose. Parents considering proceeding in that way may wish to consider putting in place protective measures against the fallout from divorce for example.
h. Global property holdings – whilst SDLT only applies to property purchased in England, Wales and Northern Ireland it is being proposed that property owned anywhere in the world will be relevant in determining the application of the Surcharge.
i. Inherited properties – whilst no SDLT is payable on inherited property the inherited property will may be relevant in determining the application of the Surcharge; holding a small share in an inherited property (50% or less) received within 36 months of the relevant residential purchase will not to be taken into account.
j. Employer provided accommodation – this will not be relevant.
k. Furnished holiday lets – these will be relevant in determining the application of the Surcharge.
l. Caravans mobile homes and houseboat purchases – these are excluded from the Surcharge.
m. Timeshare properties – most timeshare agreements are not subject to SDLT but if the agreement is subject to SDLT the Surcharge may apply.
n. Companies and collective investment vehicles
– the Surcharge will apply on the first purchase of a residential property by such entities so as to close off the potential tax avoidance opportunity that would otherwise present itself.
o. Non-residential properties – the Surcharge will not be relevant to these and the definition of non-residential property is not being changed in this regard. A purchaser of non-residential property will not pay the Surcharge even if the property is later converted to residential.
Please note that a purchase of mixed use property (one with both residential and non- residential elements) and a purchase of six or more residential units in a single transaction will continue to be treated as non-residential for SDLT purposes and not subject to the Surcharge.
Note that the charging structure and rates of SDLT for such property changed with effect from 17th March (save where contracts were
exchanged prior in which case a choice exists) to introduce the tiered type of charging that applies to income tax and SDLT for residential properties. The rates on premiums are 0% up to £150,000.00, 2% from that to £250,000.00 and 5% above that. Rates on rent have changed too. The policy paper states that for premium transactions worth less than £1.05 million and for rent transactions those with a NPV of up to £5 million the same level of SDLT will be payable as under the previous system.
p. Multiple residential property purchases – multiple dwellings relief is to continue to apply albeit at the Surcharge and so needs to be considered where more than one residential property is being purchased.
It should be borne in mind that claw-back provisions apply in this regard and that treatment may be more favourable under the alternative method of charging applicable where six or more residential properties are being purchased in the same transaction mentioned above (i.e. on a non-residential basis).
q. Social landlords and charities – the Surcharge will not apply in circumstances in which exemptions would usually apply.
r. Treatment of large scale investors – there are no exemptions for them (the Government had considered exempting corporates and funds where either they had an existing residential property portfolio of at least 15 properties or purchased at least 15 residential properties in one transaction).
s. Trusts and settlements – purchases by Trustees of bare trusts will continue to be treated as if they were made by the beneficial owner. Purchases and ownership by trustees of trusts with life or income beneficiaries will be tested based on circumstances of those beneficiaries. All other purchases of additional properties by truss will be liable at the higher rates.
The picture is not complete; these comments are made subject to sight of the detailed rules. SDLT is a complex area. Consequently you should obtain advice with regard to your particular circumstances rather than relying on this summary.
If you are engaged in sales of property whether new build or otherwise and are considering discounts or allowances for your purchaser(s) to offset the Surcharge we would recommend that any such discount or allowance is made conditional upon the Surcharge actually becoming payable. Please contact us for further advice in this regard.
Many thanks to Mark Vinall