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SDLT: Be in full possession of the facts

SDLT: Be in full possession of the facts


The SDLT regime for residential property is complex and solicitors must ensure they understand the full fact pattern of their client's case before advising, explains Elizabeth Small

Since spring 2012 the taxation of residential property has radically changed. This article considers only stamp duty land tax (SDLT). In this complex landscape, it is vital that the exact fact pattern of your client is understood as subtle variations in fact can result in widely varying outcomes.

You need to consider (at a minimum):

  • Is the property residential, commercial, or mixed use, and what is the intended use?

  • If residential, then who is buying the property?

  • Does the flat rate 15 per cent regime apply, including the application of reliefs?

  • Does the 3 per cent surcharge regime apply?

  • What is the impact of the linked transactions rules and may multiple dwellings relief (MDR) apply?

What is residential property?

Section 116 of the Finance Act 2003 has a ‘basic definition’: residential property is a building, or part of a building, which is either:

  • Used, or suitable for use, as a single dwelling; or

  • In the process of being constructed, or adapted for use, as a single dwelling.

This basic definition is extended to include certain types of residential accommodation, such as accommodation for school pupils, while excluding others – for example, halls of residence for university students, hospitals, and prisons are excluded.

Any building which is not residential is commercial for SDLT purposes, in which case the top rate of SDLT is 5 per cent as opposed to a top rate of 15 per cent for residential property. As discussed later in this article, a mixed-use building may have to be treated as two distinct purchases (i.e. the dwelling versus the commercial units).

A lot turns on the meaning of residential and sometimes it can be a grey area. HMRC guidance starts by clearly stating that the current use of a building should be the determining factor, overriding the past or future use of the property, but the basic definition looks forward and asks whether a building is being ‘constructed’ or ‘adapted’ for use as a dwelling.

HMRC guidance goes beyond the legislation and seeks to include buildings that are being ‘marketed for, or restored to, domestic use’ as residential. In my opinion, ‘restored to’ has some legislative justification, being akin to ‘adapted for’, whereas ‘marketed for’ does not.

An important exception to the residential rule occurs where six or more separate dwellings are the subject of a single transaction: broadly this may be treated as a commercial transaction. Usually commercial treatment with a top rate of 5 per cent is preferable to residential now that we have the 3 per cent surcharge regime (as discussed later in this article), but always do the calculations to verify this.

This is the case even when applying MDR, which allows a purchaser to pay SDLT by reference to the mean consideration paid for the dwellings rather than paying SDLT on the aggregate at the top rate applicable to the aggregate purchase price.

Who is the buyer?

Once you have determined the SDLT category of the building your client is buying, you need to know who will be purchasing the property and what use it will be put to.

Always enquire whether the purchaser is buying for themselves, as a nominee, as a trustee for a discretionary trust, or for a life tenant.

The following analysis assumes that everyone buys for themselves unless otherwise expressly stated. This article also assumes that the acquisition is of a freehold interest as there are complex and peculiar rules which relate to leases and split legal and beneficial arrangements.

If the buyer (or one or more of the buyers on a joint purchase) is a non-natural person (NNP), then you need to consider the 15 per cent regime. An NNP is a company, a property investment partnership with a corporate member (in which case the whole purchase is tainted, so the individuals in the partnership also pay SDLT at 15 per cent if no exemptions apply), or a collective investment scheme (CIS). The definition of a CIS is not straightforward and needs careful consideration.

What is the 15 per cent SDLT regime?

A 15 per cent rate of SDLT was introduced by the Finance Act 2012. This rate is applicable to NNPs purchasing residential property for more than £500,000 (when first introduced this threshold was £2m). Be warned: if an individual is a joint purchaser with an NNP and an exemption cannot be claimed, then the individual also pays the flat 15 per cent SDLT rate.

There are exemptions, and these include where a higher threshold interest is acquired exclusively for one or more of the following purposes:

  • Rental to independent third parties at a market rent;
  • Development (or redevelopment) and either resale in the course of a property development trade or rental to independent third parties at a market rent; and

  • Resale in the course of a property trading business (where the property is stock of the business).

When dealing with the 15 per cent regime, please note that where a transaction includes at least one dwelling over £500,000 or a mixed-use property containing a dwelling with a value exceeding £500,000, then the transaction is treated as two separate transactions.

Similarly, for the application of the linked transaction rules, a high-value residential transaction that is subject to the 15 per cent SDLT rate is not treated as linked to any other transaction for the purposes of determining the applicable SDLT rate for the other transaction, and a dwelling subject to the 15 per cent charge cannot be part of a claim for MDR. But the property subject to the 15 per cent charge could be taken into account in determining whether the six or more rule may apply to the other five properties.

What is the 3 per cent surcharge regime?

If the purchase is outside the 15 per cent regime, then you need to consider the 3 per cent surcharge regime, which, from 1 April 2016, applies to purchases of additional residential properties (there are transitional rules that may need to be considered). There are no business use-based exemptions under this regime. In calculating the exact SDLT liability, it may be necessary to consider the linked transaction and MDR rules.

This 3 per cent surcharge applies if on the effective date of a purchase, the buyer (who is an individual) owns qualifying interests in two or more properties anywhere in the world.

A qualifying interest is a major interest in a dwelling that has a market value of £40,000 or more and is not subject to a lease with an unexpired term of more than 21 years.

If an individual purchases absolutely (i.e. not as a nominee), then the 3 per cent surcharge regime must be considered. For individuals, it is also vital to understand whether, for example, their spouses, civil partners, or their minor children, or the minor children of their spouse or civil partner, have a qualifying interest in another property. There is only one relief for individuals: replacement of the main home.

The 3 per cent surcharge applies automatically to companies and trustees of discretionary trusts even if they own no other properties.

If your client is a company which is a trustee for a life interest trust (and is not subject to the 15 per cent regime), then you need to consider the 3 per cent additional rate regime. In these circumstances, the 3 per cent regime hinges on whether the life tenant has at the effective date a qualifying interest in another dwelling.

If a nominee company buys a property for and on behalf of its beneficiaries, which include a company, assuming the 15 per cent regime doesn’t apply, then the 3 per cent surcharge regime will instead automatically apply to the company and the other beneficiaries.

There is no equivalent exclusion for partnerships or CISs that act as trustees of settlements.

There are many nuances regarding this regime, including multiple purchases, timing, and purchases by more than one person.

SDLT for residential property is complex and you need to be in full possession of the facts before advising.


Elizabeth Small is a partner in the corporate team at Forsters, specialising in real estate and corporate tax