Further to our earlier article regarding Stamp Duty Land Tax (SDLT), HMRC have put out a consultation paper on the proposed higher rates of SDLT in relation to additional residential properties. The consultation period ended on 1 February 2016 and ‘the lines are now closed’.
We now have to wait until Budget day on 16 March 2016, to see the first draft of the legislation – although it is possible that clues will appear beforehand from north of the border, if the parallel Scottish provisions are released a week earlier.
As the consultation document shares more of the HMRC thinking, and indeed examples from them on as to how the legislations work, it is clear that there would be both intended and unintended consequences. If HMRC take on board the views of various groups within the industry by instructing the Parliamentary Counsel appropriately a number of unwanted results can be avoided.
It is relatively easy to say that if someone purchases a ‘buy to let’ property after 1 April 2016 that they will have to pay an extra 3% of the total price in SDLT; however, a number of different permutations are expected to arise depending on who is buying the property and whether the property in question is their main residence.
The current proposal includes a provision that if a property is purchased jointly, then if any of the joint purchasers are buying an additional residential property and not merely replacing their main residence, the 3% surcharge applies to the entire transaction. To be fair to HMRC, they themselves have questioned the fairness of such a measure. Those in the industry have pointed to one of the few SDLT cases we have had so far where a charity purchased jointly with a non-charity was allowed to claim relief from SDLT to the extent it was purchased on the property, even where the non-charity was not. It seems that it would be entirely possible to have a parallel system for the 3% surcharge.
An important element of the new regime concerns main residences. The surcharge applies if at the end of a transaction a person owns more than one property. At the moment the proposal is that if a new main residence is purchased without the old one being sold then 3% charge will apply, although if the old residence is disposed of within an 18 month period, a reclaim can be made.
Further, if a person owns a main residence and a buy to let property, if they sell the main residence and purchase a new main residence, (even though this would leave them the two properties after 1 April 2016), as this was merely a replacement of an old main residence, again 3% surcharge will not apply.
What is fine in theory may not be always helpful in practice. If an individual (B) who has no intention of letting any property contracts to sell his main residence and purchase a new one, but his buyer (A) fails to complete, if he completes on his new purchase he will have two properties; while he can sell to someone else within 18 months and make a reclaim, he will initially have to find the 3% extra SDLT.
The obvious way to protect against this, however, is to insist that on exchange the deposit paid is large enough to fund the 3% surcharge which would arise if A pulls out. Therefore the threat/fear of the 3% surcharge is on a very practical level likely to be enough to raise the deposits needed to enter a transaction – which is likely to be bad news for first time buyers or those with little equity and the opposite of what the Government intended.
There could be a relatively easy fix here, where if contracts had been exchanged and then one party pulls out, the 3% surcharge should not apply until the old main residence was not sold within the 18 month period. On this basis the B would not have to find the 3% or risk losing his deposit.
The relief from the surcharge for those ‘replacing a main residence’ means just that. If the old main residence is kept to rent out, and a new main residence is purchased, the old main residence has not been replaced. Therefore the 3% surcharge must be paid in relation to the new residence. It is likely that this will come as a surprise to some, who are not looking at the purchase in the round, but rather the fact that they are buying a new main residence.
Where two or more properties are being purchased at the same time, it is possible to claim Multiple Dwellings Relief (MDR). The 3% surcharge will still apply to the prices calculated pursuant to the MDR rules.
By a quirk of the legislation, if six or more properties are being purchased at the same time, the purchaser has the option to treat these as commercial rather than residential such that the rate for consideration of £500,000 or more will be 4% and the 3% on residential property will not apply. The calculation between choosing MDR and treating the properties as commercial is often finely balanced, but adding in the surcharge will tilt the balance towards claiming the commercial rate of 4%.
The Government’s current dilemmas in relation to the housing market are highlighted by their thoughts on the treatment of large scale investors. It wants the effects of the 3% surcharge to apply to most situations where rental properties are purchased as this can impact other people’s ability to get onto the housing ladder as owner occupier.
At the same time, larger scale investments can actually facilitate development and have a positive effect so there needs to be exemption from the higher rates of SDLT given in a very targeted way. The Government originally thought that an exemption should be given to funds/corporates which already have an existing residential portfolio of at least 15 properties at the time of the transaction.
Its thoughts have potentially evolved in two directions, first to include individuals as well as corporates and funds. Secondly to consider whether no regard should be had to the existing portfolio but rather if there were bulk purchase of say at least 15 residential properties as this is likely to provide a significant source of finance and add uncertainty to any particular project. Owner/occupiers cannot usually borrow for an off-plan purchase more than six months in advance of practical completion since the mortgage offer will not last more than this. Therefore, the initial finance which small developers need is therefore more likely to come from buy to let investors.
The issue remains as to whether any fund would purchase more than 15 properties in any particular development rather than spreading purchases across a number of developments; if it did, it is likely that if the choice is still available at the time, the fund/individual will claim the commercial rate which is likely to be 4%.
HMRC have informally confirmed that if a company purchases a property other than for rental it will continue to pay the existing rate of 15%, rather than the surcharge applying to this, giving a total of 18%.
In other news, the effects of the increases in SDLT generally are starting to be felt. Certainly in London the statistics reported seem to show that as high value transactions have decreased, the total tax take has decreased despite the rise in rates. George Osborne is not having the last “laffer” now!