Partner and Head of Conveyancing Katherine Eaton analyses the upcoming Stamp Duty changes
In the Autumn Statement and Spending Review in 2015 the Government announced a five point plan for meeting housing needs. Part of this plan includes a decision to charge higher rates of Stamp Duty Land Tax (SDLT) on purchases of additional residential properties, such as buy-to-let properties and second homes, starting from 1 April 2016.
The higher rates of SDLT will apply to most purchases of additional residential properties, in England, Wales and Northern Ireland taking place on or after 1 April 2016 where, at the end of the day of the transaction, individual purchasers own two or more residential properties and are not replacing their main residence. The higher rates will also generally apply to purchases of residential property by companies. First time buyers purchasing their first property or home owners moving from one main residence to another will be unaffected.
A consultation is currently under way to work out the finer details of the new SDLT regime for the purchase of additional properties. The outcome of the consultation is expected to be announced at the Budget on 16 March 2016.
The New Rates
The higher rates will be 3 percentage points above the current SDLT residential rates. They will be charged on the portion of the value of the property that falls into each band.
Band Existing SDLT rate New SDLT rate
£0* – £125k 0% 3%
£124k – £250k 2% 5%
£250k – £925k 5% 8%
£925k – £1.5m 10% 13%
£1.5m + 12% 15%
*Transactions under £40,000 are not subject to the higher rates.
So what does this look like in practice?
What if at the end of the day of my proposed purchase transaction I will own only one residential property, but it will not become my main residence?
The higher rates will not apply if you only own one property, irrespective of the intended use of that property (main residence, buy to let, purchased for a relative to occupy, or otherwise).
I own two properties. I am selling one property and buying another at the same time, but at the end of the day of these proposed transactions, I will still own two residential properties. Will I have to pay the higher rate of tax on my purchase?
Whether the purchaser pays the higher rates or not will depend on whether they are replacing their main residence. It is currently proposed that:
Where an individual has already sold a main residence in the last 18 months and is replacing it, the higher rates of SDLT will not apply. However, if the purchaser is not replacing a main residence (either because they have not sold a previous main residence within the last 18 months or the property being acquired is not a new main residence), the higher rates will apply.
A refund would be available if the previous main residence is sold within 18 months after the acquisition of the new main residence.
I am married and my spouse owns an investment property occupied by a tenant. We are now planning to sell our jointly owned home and purchase a new home together. How will we be affected?
Provided you are simply replacing your main residence and the proposed sale and purchase take place on the same day, you will not be subject to the higher rate of tax.
It would be different if your spouse was instead purchasing an additional investment property, and you were not moving home. It is also important to note that the government will treat married couples and civil partners living together as one unit. Therefore, an individual buying a property may be liable for the higher rates if his or her spouse or civil partner has an existing residential property.
I am separated from my wife and she is living in our jointly owned matrimonial home with our children. I wish to purchase my own house to live in. How will this affect me?
It is unclear at this point but the higher tax may apply. The consultation will tackle the rules to be applied to separated couples, and so full details in this regard are still awaited. However, married couples and civil partners are expected to be assumed to be ‘living together’, and therefore treated as one unit, unless and until they are formally separated by Deed or under a Court Order. There is likely to be some heated debate about whether this is fair, since many estranged couples will live separately for some time before they make a formal arrangement in this regard.
I am buying a house in joint names with my parents and I will be living in it. I am a first time buyer. My parents own their own home already. How will this affect us?
Since your parents are buying a second property which will not be their main residence, it would appear that the higher rates of tax will apply. This is a subject of much debate. Joint purchasers are expected to be treated in a similar way to couples, so that the higher rates will apply if one or more of them owns two or more properties and they are not replacing a main residence. However, the consultation is currently considering whether this would be fair for any individual involved who is effectively becoming the owner of his or her first property. Different rules may therefore be applied in your circumstances and we await the detailed guidance on this.
I am buying a second home. How do I decide which one is my main residence? Can I choose?
No, you cannot simply choose. You have to be able to justify your claim as to which property is the main residence. Individuals who become the owners of two or more residences will not be able to choose which of their residences is their main residence for SDLT purposes. The application of the tax will be based on the facts. For instance it would normally be the property at which you spend most of your time, or perhaps the one at which you are registered to vote, or the one your family lives in etc. The more facts pointing to it being a main residence, the clearer this will be.
This differs from the treatment applied for capital gains tax purposes, where you can currently ‘elect’ which property is your main residence.
I currently live in Spain in a property I own. I’m planning to move back to England and will buy a new home, but I will keep my Spanish property for a holiday home. Will I pay the higher rate of tax?
Yes. Property owned globally will be relevant in determining whether a property purchased in England, Wales or Northern Ireland is an ‘additional property’.
I own an investment property occupied by tenants worth £35,000 and I’m proposing to buy a second property to live in. Will I pay the higher rate of tax?
No. Residential properties worth less than £40,000 will not be taken into account when determining if an additional residential property is being purchased. You would be deemed to own only one residential property and the higher SDLT rates will not be applied.
What happens if I purchase a property which is not residential in nature, but agricultural for example? What if the property is partly agricultural and partly residential?
Non-residential properties will not be subject to the higher tax rates and multiple residential properties which are purchased in a single or linked transaction may be eligible for lower tax rates or tax relief. Mixed use properties are generally viewed as non-residential.
We are the Trustees of a trust created by the Will of a deceased relative. We have the power to invest trust money and are considering buying a property. How is SDLT applied in this situation?
This depends on why you are buying the property. Is it for a beneficiary to live in? Is it purely to let out and produce rental income? Who are the beneficiaries of the trust and do any of them own any other property, either legally or beneficially?
Once the consultation is complete, we are expecting detailed rules to be issued concerning less common types of purchase transaction, including properties being purchased under a Trust arrangement (where tax treatment will depend on who the beneficiaries of the Trust are and the nature of their beneficial interests in the property concerned).
We will be keeping a close eye on the outcome of the consultation as it is clear that many questions cannot be answered yet. We will be able to provide expert advice tailored to your circumstances once the final guidance is issued.
Until then, we recommend that if you are presently purchasing or proposing to purchase an additional property, you should aim to complete that transaction before 1 April 2016 to avoid the higher tax rates.
For more guidance or a quote for conveyancing please contact us by email or call 01642 233980.
If you require a quotation for conveyancing services involving the purchase of an additional property, please quote reference SDLT2016 to receive our discounted rates which are highly competitive and available until 31 March 2016.