Following changes to the stamp duty land transaction tax (SDLT) from 1 April 2016, higher rates of SDLT will apply to the purchase of additional residential properties (such as second homes and buy-to-let properties). The changes followed a surprise announcement by the Chancellor at the last budget and were passed in the Finance (No. 2) Bill 2015-16.
If at the end of a purchase a buyer owns two or more residential properties, they may be liable for a higher rate of SDLT. One of the key factors in whether extra tax is due is whether they are replacing their main residence. If the buyer has disposed of a previous main residence within 36 months of the day of the transaction, the buyer will be considered to be replacing a main residence and no extra tax will be due.
The change doesn’t apply only to properties in the UK. If a buyer has an interest in a dwelling anywhere else in the world, then the higher rate must be paid on the purchase price. The rules about what constitutes an ‘interest’ are not completely clear, but the act describes it as a ‘major interest’ and worth more than £40,000. The phrase ‘major interest’ does not specifically quantify the size of an interest but tries to ensure that, where in other jurisdictions there may be different concepts of property ownership, these are accommodated. In English law a freehold or long leasehold is deemed to be a major interest. So for example, a lease of less than seven years will NOT constitute a major interest.
Two specific situations in which queries might arise about the liability for extra tax are in relation to divorce and inheritance. The rule will apply as follows:
• Where a spouse or civil partner purchases a new property alone, they will probably be liable unless they are divorcing or separating and can prove to the HMRC that there is a permanent desire to live separately.
• Where property is inherited, then there may be liability when a person becomes entitled to an interest and wants to purchase a second home. The rules here are complex, but exemptions may apply when a property is inherited less than three years prior to the purchase of another property.
The rates
The additional 3 per cent rate will apply to transactions that complete on or after 1 April 2016. The new rates will apply to the portion of the consideration that falls within each rate band, as follows:
Up to £125,000 3 per cent
Over £125,000 and up to £250,000 5 per cent
Over £250,000 and up to £925,000 8 per cent
Over £925,000 and up to £1,500,000 13 per cent
Over £1,500,000 15 per cent
When is a buyer replacing a main residence?
Most individuals have only one residence at any given time. Where an individual has more than one property, in most cases it will be clear which one is the main residence; for example, an individual owns two properties, one which they live in and one which they let out.
Individuals will not be able to elect which of their residences is their main residence, and therefore the treatment of a main residence for the purposes of the higher rates of SDLT may differ from the treatment for capital gains tax.
Whether a property is a main residence will be based on fact. HMRC will take into account a number of factors when considering whether a given property is an individual’s main residence. These will include
• where the individual and their family spends their time;
• if the individual has children, where they go to school;
• at which residence the individual is registered to vote;
• where the individual works; and
• the location and degree of furnishing and location of moveable possessions.
In most cases, the position will be clear and few factors will need to be considered. For example, where a married couple owns two properties, one of which is convenient for their work and their children’s school and where they spend most of their time, and the other a holiday home which they visit occasionally, the former property would be their main residence.
Non-residential property
The higher rates of SDLT will apply only to purchases of residential property. Non-residential property includes:
• commercial property (such as shops or offices);
• agricultural land; and
• forests.
How property lawyers should deal with the changes in practice
Those working in conveyancing will need to ensure that clients understand the additional SDLT charge if it applies. A lawyer may not know when quoting whether the client owns any other interest in a dwelling worldwide, so this question will need to be asked when a quote is given.
If a lawyer is acting for a buyer, one piece of information which will need to be obtained is whether the property will be a main residence or is replacing a previous main residence. To determine this, the client should be asked whether they have disposed of any residential property within 36 months of a transaction.
Ultimate responsibility for the accuracy of an SDLT return remains with the buyer. Their lawyer may not be able to say whether a property has been a client’s main home. Despite disclosure to HMRC being the responsibility of the client, it would be a foolish (and potentially negligent) conveyancer who did not explain the higher tax liability when giving a quote.