The pitfalls of oversimplifying the stamp duty changes

Sarah Hoad explains why you need to consider what is currently known about the stamp duty changes and how they could affect your clients.

Consultation for the proposed stamp duty (SDLT) changes to be introduced on 1st April 2016 for those buying their second (or more property) closed on 1st February. We now have to wait with baited breath until 16th March 2016 when the final details of what appears to be an overly complicated new tax regime for SDLT will be announced in the budget. Pending these announcements, we need to consider what we know now about these changes and how they could affect our clients.

What questions should we be asking our clients?

Aside from highlighting the obvious 1st April 2016 deadline, I am finding that I am having to delve much deeper into people’s circumstances. The gov.uk table we are all familiar with (see Figure 1 in the Government’s guide to the proposed changes: https://www.gov.uk/government/consultations/consultation-on-higher-rates-of-stamp-duty-land-tax-sdlt-on-purchases-of-additional-residential-properties/higher-rates-of-stamp-duty-land-tax-sdlt-on-purchases-of-additional-residential-properties) is helpful but there are many scenarios that clients are putting forward that aren’t easily dealt with using this over-simplified flowchart.

Just yesterday I was instructed by a French client who lives and works in London who is buying his first property in the UK. He intends to live in it with his wife and two children but he owns a flat in Paris from his student days that is rented out. He just could not understand why he would have to pay the additional stamp duty when this was his first property in this country. A clear message is being conveyed to the world at large that we view not only English, Welsh and Northern Irish investors but also foreign buyers and those with property outside of England, Wales and Northern Ireland as those who should pay a premium for owning a second property here.

The important word to consider when people are asking whether they will have to pay the additional levy is whether or not they are ‘replacing’ (for which read ‘selling’) their main residence for the property they are buying. It should be clear by which property a client lives in but it is possible they could have two properties that they split their time between. In this case factors such as where the client spends their time, their children’s schooling location, where they work and where they are registered to vote all become relevant.

In addition, what about a client who is in the process of extending a lease on a second property where the premium is more than £40,000? There is no guidance released yet in relation to whether or not the surcharge will be applied to lease extension premiums, and apparently the higher rates will only apply to additional properties purchased in England, Wales and Northern Ireland on or after April 1st 2016. However, given there is no legislation or guidance yet, it may be prudent to proceed on the basis that the surcharge will be applied and budget accordingly.

One last point to consider are completion dates of current transactions. I am flagging to buyers looking to complete before the 1st April 2016 that completion dates must either be set for no later than the 15th March 2016 or the Standard Conditions of Sale need to be varied to reduce the notice to complete period in order to avoid a scenario where completion is delayed beyond 31st March through no fault of the buyer, who would then be caught by the new rates.

Are your clients clear on the implications the new rules could have on joint purchasers?

Another scenario not mapped out in the gov.uk chart (but referred to in the consultation guidance) concerns married buyers or those in a civil partnership buying a property together for the first time as a main residence where one of them already owns a property. As the main residence is not being replaced, they will be liable to pay the higher rate notwithstanding that one of them does not own a property. It is anticipated that if the second property is sold within the proposed 18 month window then they will be able to claim a refund but we will need to see if this is provided for. This also begs the question as to what would happen with transfers of equity between couples – would the higher rate apply? Presumably but I have seen no mention of it.

As is not uncommon today, what happens if clients are buying a property with someone else such as a co-habitee or a friend? The current proposal is that if either buyer has two or more properties and they are not replacing a main residence then the higher rate applies. The Government was, however, keen to hear as part of the consultation whether this would be fair on the buyer who does not own a property so we will have to wait until 16th March for the outcome.

How much will the additional tax cost affected buyers?

The additional 3% that is to be levied is to be added to each of the bands to be applied to the price. The additional cost is not insignificant. On a property valued at £500,000, without the additional levy stamp duty is £15,000 but add the 3% and it will be £30,000. A useful calculator applying the additional levy can be found at http://www.knightfrank.co.uk/stamp-duty-calculator courtesy of Knight Frank.

Those planning to buy a property as a main residence now and then sell their main residence within the proposed 18 month window following that purchase will still have to pay the additional 3% up front and then reclaim it upon a sale of the former main residence. This is not an inconsiderable additional sum of money for buyers to have to find and it is important to ensure they are aware of this additional upfront cost.

In conclusion, whatever form the legislation ultimately takes, it is more important than ever to find out as much as you can about your clients and the extent of their property portfolios so that you can ensure they can manage their affairs in the full knowledge of the changes that are about to be introduced.

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