SDLT and additional properties
Paul Butt looks into the less obvious problems caused by the new rules on SDLT and issues you may not have considered.
I hope that you have all now recovered from the pressures placed on you due to the need to complete numerous transactions before the end of March – before the new rules on Stamp Duty Land Tax (SDLT) on additional properties came into force on April 1st.
But these new rules and the problems they cause will not go away – no doubt you are already receiving enquiries from clients as to how they can ‘get around’ the rules as the extra SDLT payable will be substantial. So for a buy to let purchase for £200,000 under the old rules, £1500 SDLT was payable. Under the additional property rules it becomes £7500.
Some clients will, of course, be more than happy to tell lies on the SDLT return and will get annoyed (at the least!) if you remind them that they might be prepared to commit fraud, but that we cannot be involved with such criminal activities. It is inevitable that some clients will blame the conveyancer for giving them this bad news, so watch out for the flak!
An overview of the new rules
The basic rule is that if at the end of the day of completion of a residential purchase, a buyer (or his or her spouse or civil partner) owns a ‘major interest’ in another residential property anywhere in the world, the higher rates are payable – unless the property is a replacement for the buyer’s main home which is being sold.
A ‘major interest’ is either a freehold interest or a leasehold interest that was originally granted for a term of more than seven years.
Note, however, that the value of this other property – or the value of the person’s share in that property if it is jointly owned, must be worth more than £40,000 for these rules to apply. So if the other property owned by the buyer is a half share in a holiday home in France valued at £75,000, as half of this is less than £40,000, the new rules will not apply.
Most people only own the house they live in so they will not be affected by the new rules. It is only the fortunate few who own a holiday home or buy to lets that are likely to be affected.
But for those fortunate few, it is very difficult to see any lawful way of avoiding the extra SDLT. So the buyer cannot get around the rules by setting up a company to buy the new property; even the first purchase of a residential property by a company will be subject to the additional rates.
Nor does it help if the second property is bought in the name of the other spouse; spouses and civil partners are treated as one ‘unit’ for these purposes.
Less obvious problems
You may have already have become aware of the wide range of situations where SDLT is now an issue. Three examples from the office: Father owns family home; some time ago he transferred it into the joint names of himself and his daughter who still lives at home; she is now moving on and buying a house to live in; because of her half share in Dad’s house, she will pay the extra SDLT. And yes, she could transfer her half share back to dad to solve that problem, but do make sure it is made clear that she retains no interest under a trust.
And then we have the (unmarried) couple who bought a flat together; they have now split up; Person C has moved out and gone back to live with mum and dad; Person D still owns the house she lived in before buying the flat; it is tenanted; she is now buying Person C’s share of the flat in which she intends to continue living – a transfer of equity; once again due to the other property she must pay the extra SDLT. And remember, SDLT will be assessed not just on the amount she is paying for the half share of the equity, but on the value of the share of the outstanding mortgage she is taking over.
Or what about Mum and Dad who want to provide accommodation for son or daughter whilst studying at University? If they buy a property in their own names (assuming they already own their home) they will pay the extra SDLT. One possibility would be to give the money to son so he can buy in his own name (making sure that they retain no trust interest) but they may not wish to give him many thousands of pounds. Of course, in reality, it is unlikely that this will be a cash purchase; there will be need for a mortgage. No doubt a lender could be found to lend to student son (with no income) with mum and dad acting as guarantors, but this may well limit the choice of mortgage loan.
The newspapers have also spotted another consequence of the new rules – granny flats. Clients are replacing their main home, they own no other house. If the house being purchased consists of two self-contained properties i.e. the main home to be lived in and the granny annex then at the end of the day of completion of the purchase they own two houses. If both (valued separately) are worth more than £40,000 then the additional rates will apply. To quote the HMRC Guidance Notes: “This is irrespective of whether the individual owns an interest in another dwelling at the end of the day or whether one of the purchased dwellings replaces a main residence.”
So just a few issues we can look forward to explaining to clients in the coming days. Do make sure that you have looked more fully at these new rules – or ensure that there is an SDLT specialist in your firm you can refer to.