SDLT traps for the unwary
Conor Brindley and Matt O'Brien advise on the fairly innocuous situations that could lead to purchasers paying the new additional rate of stamp duty land tax
The additional 3 per cent rates of stamp duty land tax (SDLT) have now been in force for a couple of months, having caused grumbles among advisers since their announcement in last November's Autumn Statement. They apply to 'higher-rates transactions', to be inserted into the Finance Act 2003 as a new schedule 4ZA.
Broadly speaking, where the purchaser is an individual, the higher rates will apply to the purchase of a major interest (freehold or lease of at least seven years) in a single dwelling by an individual, if at the end of the day of purchase conditions A to D are met:
A) The chargeable consideration is £40,000 or more;
B) The dwelling is not subject to a lease with more than 21 years to run;C) The purchaser owns an interest worth £40,000 or more in another dwelling which is not subject to a lease with more than 21 years to run; and
D) The dwelling being purchased is not replacing the purchaser's only or main residence.
While seeming relatively straightforward for an individual purchaser, some fairly innocuous situations may catch out the unwary.
Property in joint names
Higher-rate SDLT may apply where a husband and wife decide to 'put' their main residence, currently owned by one spouse, into joint names and either of them already owns another dwelling. Where the home is subject to a mortgage, the transferee spouse will be required to assume half the mortgage when the property is transferred into joint names. For SDLT purposes, the assumption of half the mortgage is treated as 'chargeable consideration'. Accordingly, if the mortgage is £80,000 or more, conditions A to D will be satisfied (condition D will be met as the transfer from single to joint names will not fall within the statutory provisions for replacing a main residence; the definition requires two transactions: the sale of the old home and the purchase of the new one). Contrast this with the situation where the spouse owning the main residence sells it and the replacement is purchased in joint names. The additional 3 per cent charge won't apply as condition D will not be satisfied.
Where spouses or civil partners both individually own a residential property, but live together in one of them, another trap potentially awaits. It is easy to envisage the couple deciding to purchase a new main residence but selling the property they are not living in to finance the purchase, intending to hold their current home as an investment property. As the main residence is not being replaced (despite the individuals, in reality, moving to a new main residence), they are caught by the 3 per cent rates and no refund will be available within the three-year period after the purchase.
Note that it is not possible to make an election as to which home is classified as an individual's main residence (as for the principal private residence exemption for capital gains tax), as it is a question of fact. Also note that spouses and civil partners are treated as a single person for supplemental 3 per cent charge purposes.
Pre-November 2015 disposals
Transitionary provisions give some comfort for individuals who disposed of their main residence before 25 November 2015. If that individual currently owns one or more dwellings, but not a main residence (i.e. they are living in rented accommodation), provided a new main residence is acquired on or before 26 November 2018, the higher rates will not apply.
Under the new rules, purchases of a dwelling with a so-called 'granny annex' would be caught by the higher rates, as the transaction would be treated as an acquisition of two dwellings (in particular conditions C and D are satisfied). The government confirmed in April that this was not intended, and therefore it is amending the Finance Bill 2016 to ensure such purchases are not caught.
Purchases through vehicles
The new rules are slightly modified in situations involving company purchases of residential properties. Companies will pay the additional 3 per cent SDLT on purchases of residential property, even if that company owns no other residential properties.
The supplemental 3 per cent rate will not, however, apply to purchases by companies of 'higher threshold interests' which are subject to the 15 per cent flat rate charge, i.e. such transactions are not subject to an 18 per cent charge.
Whether or not a trust pays the higher rates depends on whether the trust is a life interest or discretionary trust. Trustees of discretionary trusts pay the higher SDLT rates on purchasing any residential property, even if it is the trust's first purchase.
Where it is an interest in possession or life interest trust, the application of higher rates depends on whether the trust beneficiary already owns a residential property (or an interest in one) and intends to occupy this as their main residence.