Published April 8th 2016

SDLT - tales of the unexpected

In terms of what the Chancellor gave us in the Budget/Draft Finance Bill, in respect of residential real estate we largely got what we expected, but in terms of non-residential there are some unexpected changes.

Residential transactions

The rate of SDLT for each of the bands is increased by 3% where there is a ‘higher rates transaction’. This will apply where an individual and in some cases buyers who are not individual purchases a major interest (freehold or lease longer than 7 years) in a ‘dwelling’ (the purchased dwelling) and conditions (a)-(d) are met. The conditions for individual purchasers are as follows:

the price is £40,000 or more;
on the effective date of the transaction the dwelling is not subject to a lease which has an unexpired term of more than 21 years;
the purchaser owns a ‘major interest’ in a dwelling (freehold or lease longer than 7 years) other than the purchased dwelling and the original dwelling has a market value of greater or equal to £40,000 and is also not subject to a lease which has an unexpired term of more than 21 years.
the purchased dwelling is not a replacement for the purchaser’s only or main residence.

Dwelling

The definition of ‘dwelling’ covers any building used or suitable for use as a single dwelling or the in the process of being constructed or adapted for such use. Land that either is to be occupied or enjoyed with the dwelling as garden or grounds is also taken to be part of the dwelling. Certain buildings are taken out of the definition of dwelling in line with the established VAT definitions such as schools, student accommodation and buildings housing the disabled and care homes. There are not, therefore, be subject to the 3% surcharge.

Replacing a main residence

The basic charge will cover most purchasers of second homes and buy-to-let properties which are not subject to long leases. The focus is certainly on taxing these sort of properties rather than where owner occupiers move house.

The draft legislation therefore provides a definition of a replacement for the purchaser’s only or main residence, being a transaction which involves the purchaser intending the purchased dwelling to be their only or main residence, where they have previously sold their land only or main residence within a 3 year period ending on the date of the purchase of the purchased dwelling. In addition, between the previous sale and the current purchase the purchaser must have had no other dwelling intended to be the only or main residence.

This is a situation where someone has sold their only or main residence within the last 3 years. Possibly more relevant is where a purchaser buys another property to be his only or main residence without having sold his previous main residence. In this situation, the purchaser will initially pay the extra 3%, but if within the next 3 years he sells his previous main residence, then it is possible to submit an amended SDLT return and claim back the extra 3%.

Spouses & civil partners

The remainder of the draft legislation focuses on various different situations. The most obvious potential route around the new charge would be to have one house owned by one spouse/civil partner and another owned by the other. The extra 3% charge will apply, if it would have applied had the spouse/civil partner been a purchaser, thereby killing off any thought of being able to use this route.

The same is true of settlements and bare trusts if these purchase a major interest in a dwelling. Where the purchaser is acting as a trustee of a settlement and the beneficiary can either occupy the property for life or be entitled to income earned in respect of the dwelling, then the beneficiary is treated as the purchaser. They would therefore be treated as an individual purchasing a dwelling and if the other conditions are met they would be subject to the 3% surcharge. Similarly, where a person’s child would otherwise be treated as being a purchaser, the parent is treated as the purchaser.

Finally, if someone by virtue of an inheritance becomes jointly entitled to a major interest in a dwelling but their beneficial share is less than 50% then the 3% surcharge does not apply; however, if during the period of 3 years beginning with the date of the inheritance the interest increases to more than 50% then while there is no 3% charge retrospectively applied to that purchase, the interest will count when assessing whether any future purchases are of additional properties.

The draft legislation confirms that any dwellings held by a purchaser outside of England and Wales/Northern Ireland will count for the purposes of assessing whether any new purchases will be treated as additional properties subject to the 3% surcharge.

Joint purchasers

One of the less palatable features of the new regime concerns joint purchasers. If 2 or more purchasers buy jointly, then if any one of them satisfies the conditions the higher rates apply. Here, if one of three joint purchasers already owns a property, the extra 3% is chargeable (provided, again, that the interest costs at least £40,000 and there is no 21 year lease to which it is subject).

Real estate funds

There was a possible exemption in the consultation document for real estate funds with 15 or more properties. This does not appear in the draft legislation, with HMRC making use of representations against this from individual landlords.

Multiple purchases

For purchasers of more than one dwelling, the higher rate can apply if in relation to at least 2 dwellings there is no 21 year lease to which the dwellings are subject and the consideration to be apportioned to each is at least £40,000. It is still possible to claim multiple dwellings relief, though higher rates apply and, oddly, there seems not to have been a change to the rule which allows a purchaser of 6 or more dwellings to be treated as commercial property and subject to rates for non residential real estate.

Non individual purchasers

Higher Rate Transactions where the extra 3% are payable is not limited to purchasers who are individuals. If a purchaser which is not an individual buys a single dwelling, provided the consideration is at least £40,000 and not subject to a lease with 21 years left to run, then the higher rates apply. If the transaction is for 2 or more dwellings then if the consideration attributed to at least one of them on a joint and reasonable basis is at least £40,000 and there is no 21 year lease then again the higher rates apply.

Non-residential transactions

If the legislation regarding residential real estate was largely expected, the changes to commercial real estate were certainly not (there were rumours of certain government ministers having no idea of the proposals even the day before Budget Day!).

In line with the current residential system the Chancellor proposes to move SDLT charges on commercial property from the ‘slab’ system to the ‘slice’ system. This will work as follows:

Transaction value band	Rate
£0 – £150,000	0%
£150,001 – £250,000	2%
£250,000 +	5%

Whether moving to this system was intended to de-emphasise the ultimate increase is not clear, but in relation to any transactions where the price is more than £1.05 million, there will be an increase in SDLT. For sizeable commercial transactions the banding will be of little relevance whereas adding a 1% increase to the 4% current rate represents a 25% increase.

There is worse news in relation to leaseholds in that a new 2% band has been introduced. Rent is taxed in relation to the total net present value of the rent which can be calculated using the HMRC calculator. The new rates bands and thresholds for rent paid under a lease are as follows:

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

The new charges will apply in relation to all sales and leases completed after 17 March 2016, save for those completed after this date pursuant to an agreement for lease entered before it, which has not been varied/assigned/sub-sold before completion.

On a 15 year lease the 2% would be payable on all rents in excess of around £440,000 per year.