Consultation on Second Home Stamp Duty Land Tax

January 11th, 2016

The Government has launched a consultation on the new higher rates of Stamp Duty Land Tax that will apply to purchases of second homes on or after 1 April 2016, as announced at the Autumn Statement. The higher rates will apply to purchases by trusts and companies as well as to purchases of additional property made by individuals and married couples unless they are at the same time replacing their main residence.

At the Autumn Statement, the Government announced that it would be introducing higher rates of Stamp Duty Land Tax (SDLT) as part of a Five Point Plan for housing which aims to re-focus support for housing towards low-cost home ownership for first-time buyers.

The higher rates will apply to transactions completed on or after 1 April 2016 in England, Wales and Northern Ireland where, at the end of the day of the transaction, an individual purchaser owns two or more residential properties (or, in the case of joint purchasers, either one of the joint purchasers owns two or more residential properties) and they are not replacing their main residence. So, a person who already owns both a main residence and a buy-to-let and who sells their main residence and buys a new one, will not pay the higher rates (despite owning two properties at the end of the day of the transaction) because they are replacing their main residence. Contrast the person who first purchases a buy-to-let (which is not to be used as a main residence – perhaps because the purchaser is living in rented or job-related accommodation or with parents) and later buys a main residence. In this situation, the higher rates will be payable because the person owns two properties at the end of the day of the transaction and has not replaced their main residence.

Note that if the purchaser has sold a previous main residence within 18 months before the day of the transaction and the transaction is a purchase of a new main residence, the purchaser will be considered to be replacing a main residence. Whether or not a property constitutes a ‘main residence’ will be determined according to the facts.

Where it is intended that the second property will replace the main residence but the main residence has not yet been sold, the transaction will be subject to SDLT at the higher rates but a refund will be given if the original residence is sold within 18 months of the transaction.

Both inherited property as well as property owned overseas will be relevant in determining the number of properties owned at the end of the day of the transaction where the new property is situated in England, Wales or Northern Ireland. Where the new property is located overseas, SDLT will not of course be payable on the purchase (although instead it may be liable for any property transactions tax in that jurisdiction).

The new rates

The higher rates will be 3 percentage points above the current SDLT residential rates and will be charged on the portion of the value of the property that falls into each band as follows:

Band Existing residential SDLT rates New additional property SDLT rates
£0 – £125k 0% 3%
£125k – £250k 2% 5%
£250k – £925k 5% 8%
£925k – £1.5m 10% 13%
£1.5m + 12% 15%

 

Example

An additional residential property is purchased for £200,000. SDLT is calculated as follows:

  • 3% on the first £125,000 = £3,750
  • 5% on the remaining £75,000 (the portion between £125,000 and £200,000) = £3,750

The total SDLT due is therefore: £3,750 + £3,750 = £7,500

Note that the higher rates will not apply to transactions completed after 1 April 2016 if contracts were exchanged before 25 November 2015 or to purchases of commercial properties.

Married couples, trusts, companies and other specific situations

It is important to note that married couples and civil partners are to be treated as one ‘unit’ for the purposes of the new rules. This means that properties owned by either partner (or their minor children) will be relevant when determining the number of properties owned at the end of the day of the transaction. This means that an individual buying their first or only property could in some cases be charged the higher rates of SDLT on the purchase (i.e. if their spouse owns a property already). This will be the case unless the parties have formally separated (although the consultation specifically seeks views on this aspect of the proposed rules).

It is also proposed that the ‘one unit’ approach will apply to joint purchasers generally, regardless of their relationship but, again, the consultation document acknowledges that this could result in an inequitable situation in some cases (for example, where one party owns no other property and is buying jointly with someone else as a way of getting onto the property ladder) and seeks views on how joint purchasers might alternatively be treated to ensure a fair result.

Note that where parents help their adult children purchase a property, the new higher rates will only apply if the parents become owners of the new property (sole or joint) and they also have a residence of their own. The higher rates will not apply where a parent simply lends or gifts money to assist the purchase in the name of the (adult) child or acts as a guarantor on the mortgage.

The higher rates will also generally apply to purchases of residential property by companies (even if it is the first residential property purchased by the company) and to purchases of residential property made by trustees of discretionary trusts. Where the trust is a bare trust or an interest in possession trust, the question of whether or not the higher rates will apply to the transaction will be determined by reference to the number of properties owned by the absolutely entitled or interest in possession beneficiary. Likewise, where a beneficiary with an interest in possession in a trust holding residential property makes a purchase of an additional property outside the trust, the new higher rates of SDLT will apply unless the beneficiary is replacing his or her main residence.

Specific rules will also apply to purchases of multiple dwellings (i.e. purchases of 6 or more residential properties in the same transaction) and it is proposed that an exemption will apply to bulk purchases (of at least 15 residential properties) which significantly contribute to new housing supply and the government’s wider housing objectives, regardless of whether the purchaser is an individual or non-natural person (such as a corporate or fund).

This consultation will run from 15 December 2015 to 1 February 2016 and confirmation of the final design will be announced at the Budget on 16 March 2016.

The proposed wording of the new rule ensures that any person who either becomes an owner of a second home for the first time on or after 1 April 2016 or replaces an existing buy-to-let on or after that date will pay SDLT at the higher rate.

However, administration and compliance may present challenges. The existing SDLT return will need to be adapted to include questions such as whether any newly purchased residential property will be a main residence and will be replacing a previous main residence; and HMRC recognises that it may be necessary for them to ask for information in support of an individual’s claim that a property was or was intended to be their only or main residence to ensure that the correct amount of tax is collected. HMRC will also need to design a system for the filing of claims and payment of refunds (the incidence of which is likely to increase significantly after 1 April 2016).