THE 3% SDLT ADDITIONAL CHARGE ON ACQUISITIONS OF RESIDENTIAL PROPERTIES by Patrick Cannon Barrister, Tax Chambers, 15 Old Square Contents Page 1 Background and Context... 1 2 Basics of the 3% Additional Charge... 2 3 Impact of the Additional Charge Some Examples... 4 4 When the Additional Charge will not apply... 5 5 Main Residence Exemption... 6 6 Married Couples and Civil Partners... 7 7 Joint Purchasers and Partnerships... 9 8 Interaction with Multiple Dwellings Relief... 9 9 Large Scale Investors Exemption... 10 10 Conclusions and Planning for the Additional Charge... 11 DISCLAIMER: These notes do not constitute legal advice. They are simply an expression of my views, put forward for consideration and discussion. No action should be taken nor omitted in reliance on them and independent professional advice should be taken in every case. I accept no legal responsibility for them. PC1692 The 3% Additional SDLT Charge 28 1 2016
1 Background and Context 1.1 The election of the Conservative government at the May, 2015 general election has been followed by a surprising attack by the Chancellor, George Osborne, on its natural supporters using the tax system. Private investors, businesses, entrepreneurs and the thrifty are being targeted by the following changes due in 2016: 1.1.1. an increase in the tax on dividends at the upper rate to 38% which means an effective rate of tax of 50% given that companies have already paid 20% corporation tax on historic profits; 1.1.2. the reduction in the annual investment capital allowance from 500,000 to 200,000; 1.1.3. the progressive restriction of relief for interest costs against residential rent income from 2017 to the basic 20% rate of tax only, increasing the cost of mortgage finance for the upper rate taxpayer from 55 per 100 interest to 80 per 100 interest; 1.1.4. the reduction in tax allowable pension contributions from 50,000 to 40,000 pa and for high earners to 10,000 pa and the reduction in the lifetime allowance from 1.25m to 1m plus further restrictions to be decided in Budget 2016, making tax allowable pension savings for high earners marginal at best; and PC1692 The 3% Additional SDLT Charge 28 1 2016 1
1.1.5. following on from the massive increase in the rates of SDLT on residential purchases above 937,500 in December, 2014 with the top rate increasing from 7% to 12% on the slice above 1,500,000, the Treasury announced in November, 2015 the imposition of an additional 3% SDLT surcharge on the acquisition of interests in additional residential properties by individuals and companies from April, 2016 and a consultation document was issued in late December, 2015 ( the Condoc ). 1.2 This latter announcement is examined in detail in the rest of these notes. 2 Basics of the 3% Additional Charge 2.1 The policy driver for the change is said to be fairness ie to reduce price competition between first-time buyers and buy to let investors, but allow exemption for larger investors who buy in bulk off-plan and thereby assist developers in funding projects. The suspicion is that this is a tax rise masquerading as fairness given that it is difficult to understand how an additional 3% added to the 12% charged above 1.5m is going to assist first-time buyers. The 3% may also be intended to plug the revenue gap created by the large fall in SDLT revenue caused by George Osborne s ill-fated rate changes in December, 2014 described at 1.1.5 above. In July, 2015 the London Evening Standard 1 1 Stamp duty rise hits London home prices with fastest fall since the crash Evening Standard, 24 July 2015. PC1692 The 3% Additional SDLT Charge 28 1 2016 2
reported that the Treasury would be alarmed by the 1.58 billion fall in SDLT receipts or 26% in the first six months of 2015 despite the rising property market. One can speculate that the 3% measure was cooked-up over the Summer of 2015 in response to the Chancellor s mistake over the 2014 rate reform and then presented as a fairness measure in the Autumn Statement. 2.2 The charge will not apply where at end of day of purchase a sole purchaser owns an interest in only one residential property, or joint purchasers together own an interest in only one residential property. 2.3 The charge will apply to purchases of additional residential properties in England, Wales and Northern Ireland where, at the end of the day of purchase, sole or joint purchasers own two or more residential properties and are not replacing their main residence. 2.4 The charge will also generally apply to purchases of residential property by companies except where the 15% rate under Sch 4A already applies. 2.5 The charge applies from 1 April, 2016. 2.6 The charge will be 3% above the current SDLT residential rates and will be charged on the proportion of the price of the property that falls into each band PC1692 The 3% Additional SDLT Charge 28 1 2016 3
Band Basic residential SDLT rates Additional SDLT rates 0* - 125k 0% 3% 125k - 250k 2% 5% 250k - 925k 5% 8% 925k - 1.5m 10% 13% 1.5m + 12% 15% 2.7 *Transactions under 40,000 do not require a tax return to be filed with HMRC and are not subject to the additional charge. 2.8 Mixed residential and non-residential property remains exempt from residential rates and will not attract the 3% charge, and will still be charged under the slab system with a maximum rate of 4%. 3 Impact of the Additional Charge Some Examples 3.1 The existing ownership of a residential property such as a modest pied a terre, a flat for student children or a foreign home could mean that the purchase of the additional property will attract the additional charge except where the purchaser is replacing a main residence (see below). 3.2 The purchase of a residential property for 175,000 normally attracts SDLT of 1,000 (nil on the first 125,000 and 2% on the next 50,000). If this is the purchase of an additional residential property however the SDLT will be 1,000 plus 5,250 (3% of 175,000) = 6,250, a more than six fold increase. 3.3 The purchase of a residential property for 2,000,000 normally attracts SDLT of 153,750. If this is the purchase of an additional residential PC1692 The 3% Additional SDLT Charge 28 1 2016 4
property however the SDLT will be 153,750 plus 60,000 (3% of 2m) = 213,250. 3.4 The purchase of a residential property for 5,000,000 normally attracts SDLT of 513,750. If this is the purchase of an additional residential property however the SDLT will be 513,750 plus 150,000 (3% of 5m) = 663,750. 3.5 With the SDLT cost of purchase at such high levels some potential purchasers are considering renting a property instead. For example a non-domiciled new comer to the UK with an existing home overseas would face paying 663,750 SDLT on a 5m purchase. The same amount of money would however pay for a monthly rental of 11,000 for five years. Such levels of SDLT are also deterring purchasers from moving up the housing ladder given that the 213,750 SDLT on a 2m purchase will pay the school fees for a son or daughter for their entire secondary education. 4 When the Additional Charge will not apply 4.1 The Condoc gives the following basic examples of when the additional charge will not apply because at the end of the day of the transaction an individual owns only one residential property: 4.1.1. sale of main residence and purchase of new residential property on same day; PC1692 The 3% Additional SDLT Charge 28 1 2016 5
4.1.2. purchase of first property whether as a residence or to let out; 4.1.3. person who lives in rented accommodation and owns one property which he lets out, sells that property and purchases another buy-to-let property. 4.2 In principle, the additional charge will apply when an individual purchaser owns two or more residential properties at the end of the day of a purchase transaction. 4.3 However this will depend on whether the purchaser is replacing his main residence, in which case the additional charge will not apply (see below). 5 Main Residence Exemption 5.1 A limited exemption will be available for the replacement of a previously owned (not rented) main residence. 5.2 If the purchaser has sold a main residence within 18 months of the purchase of a new main residence and is replacing that main residence then the purchase will not attract the additional charge. 5.3 The key to the exemption is that the main residence is being replaced. The purchase of a main residence is by itself insufficient to access the exemption. PC1692 The 3% Additional SDLT Charge 28 1 2016 6
5.4 Someone who owns only one property which is let out and who decides to buy a second property to use as their main residence will pay the additional charge because they are not replacing their main residence. 5.5 If the purchaser of a new main residence retains his old main residence whether to let out or to keep vacant or is trying to sell it then he will have to pay the additional charge. However, a refund will be available when the additional charge is paid on a new main residence and the old main residence is disposed of within 18 months. 5.6 What constitutes a main residence for this purpose is a matter of fact and no election is allowed unlike for capital gains tax. 5.7 There will be a two stage main residence test: (1) was a property sold in last 18 months the purchaser s main residence?; and (2) does purchaser intend to occupy the new property as their main residence? 6 Married Couples and Civil Partners 6.1 Married couples and civil partners are treated as one unit (as for the CGT principal private residence exemption, but no election is available if they own more than one property) unless they are separated under a deed of separation or a court order. 6.2 They can own only one property between them for the purpose of the additional charge and the purchase jointly or individually of an PC1692 The 3% Additional SDLT Charge 28 1 2016 7
additional property attracts the 3% charge. 6.3 A property owned by a couple s minor children is also taken into account and treated as if it was owned by the couple. 6.4 If the couple live apart but are not estranged and have two residences then which is their main residence will be a question of fact. 6.5 The following examples illustrate the position. 6.5.1. Mr A and Mrs B own two properties consisting of a buy to let and their main residence. They sell their main residence and purchase a new one. The 3% will not apply because although they own two properties at the end of the day of the purchase they have replaced their main residence. 6.5.2. However if they sell the buy to let and buy a pied a terre in London they will own two properties at the end of the day of purchase and are not replacing their main residence so the 3% applies. 6.5.3. Ms X and Ms Y are civil partners and live in Ms X s property. They separate under a deed of separation and Ms Y then buys her own property. The 3% will not apply because Ms Y owns only one property at the end of the day of her purchase. PC1692 The 3% Additional SDLT Charge 28 1 2016 8
7 Joint Purchasers and Partnerships 7.1 Joint purchasers are one unit for the purpose of the additional charge, as for married couples. 7.2 If at the end of the day of a joint purchase any one of the joint purchasers has an interest in two or more properties and is not replacing a main residence then the additional charge applies to the total consideration. 7.3 Partnerships are treated as joint purchasers and the additional charge will apply to a purchase by a partnership if any partner owns an interest in more than one property at the end of the day of the purchaser (whether as a partner or privately). 7.4 A and B own a buy to let jointly and B then buys a property of his own at the end of the day B owns an interest in two properties so the 3% charge applies. 7.5 Z and Y purchase a property together to live in which will be Z s first property but Y already owns another property that she is keeping at the end of the day Y owns two properties so the 3% charge applies to the total price. 8 Interaction with Multiple Dwellings Relief 8.1 MDR allows the buyer of multiple dwellings to pay the SDLT rates PC1692 The 3% Additional SDLT Charge 28 1 2016 9
appropriate to the average price of each of the properties purchased. 8.2 When 6 + residential properties are purchased HMRC permits the buyer to choose between paying the non-residential rate of SDLT on the entire price or the average residential rate under MDR on each of the properties. 8.3 This choice continues under the additional charge with the 3% added to the average rate if MDR is used or the 3% not charged if the nonresidential rate is opted for. 8.4 For example: A buys 10 residential properties for 3m. The average price is 300,000. A can choose to claim MDR and pay tax at the appropriate rates for the average price plus 3% = 14,000 10 = 140,000 SDLT. Instead he can opt for the non-residential rate of 4% on the whole price = 120,000 SDLT. 8.5 Solicitors should advise clients of the choice to enable clients to pay the lower amount of SDLT, or face a negligence claim, eg Mansion Estates Ltd v Hayre & Co [2016] EWHC 96 (sub-sale relief). 9 Large Scale Investors Exemption 9.1 Purchasers of 15 + residential properties are seen by the Treasury as assisting with the funding of residential projects by developers and so are regarded as a good thing. PC1692 The 3% Additional SDLT Charge 28 1 2016 10
9.2 Initially the exemption was aimed at corporates and funds but it may be extended to individual investors. 9.3 Unlike individuals, corporate investors will not be exempt from the additional charge on their first or only purchase of a residential property unless covered by the 15 + exemption in order to prevent avoidance by individuals with a property using a corporate envelope to acquire additional properties free of the 3% charge. 10 Conclusions and Planning for the Additional Charge 10.1 Will the normal rates inclusive of the 3% charge come to be seen as the default SDLT charge and the single property/main residence replacement purchase viewed as a relief ie is this a disguised tax increase wearing a fairness mask? 10.2 Will this large tax rise on residential purchases encourage further renting rather than buying causing rent increases which in turn affect generation rent s ability to put aside enough for a purchase deposit? 10.3 There is a rather obvious loophole in the proposals which if not plugged will mean avoidance will the GAAR apply if a purchase is structured to avoid the 3%? 10.4 Planning to avoid the 3%: Six-or-more residential properties purchased in a single PC1692 The 3% Additional SDLT Charge 28 1 2016 11
transaction; purchase of property used for mixed residential and nonresidential purposes; residential property purchased with a non-residential property; residential property purchase which is linked to the purchase of a non-residential property; and crowd purchasing via the web of 15 + residential buy to lets. 28 th January, 2016. Patrick Cannon PC1692 The 3% Additional SDLT Charge 28 1 2016 12