This article was written for and first published in Property Investor News.
In his Autumn Statement, the Chancellor announced higher rates of Stamp Duty Land Tax (SDLT) for purchases of additional residential properties – such as second homes and buy to let properties – to come into force 1 April 2016. The Treasury’s subsequent consultation document has provided more details about the application of the 3% surcharge initiated by the Chancellor and here Robert Maas of City-based CBW LLP warns of several potential tax traps that this reveals.
First and foremost, the proposal goes a lot wider than second homes: it applies to ALL purchases of residential property by companies and ALL purchases of residential property by most trusts. The exception is for trusts with an interest in possession (such as a life tenant) where trust purchases will be treated as made by the life tenant.
Further, where the purchase is by an individual, the 3% will apply if the individual already owns a residential property or an interest in such a property. It does not matter what the new property will be used for – although there will be an exception for the replacement of a main residence. Property owned by a person’s spouse or civil partner will be treated as owned by the individual.
All of which may create problems. Suppose, for example, Jim wants to help his daughter, Jane, buy her first home. Jim will provide the deposit and Jane, will take a mortgage guaranteed by Jim. Assuming Jane does not have an interest in any other property, the 3% does not apply if she is the sole purchaser. But Jane will find it very difficult to get a mortgage. Many lenders will want Jim to be a joint owner of the property. The 3% now applies. Although Jim may have only a tiny interest in the property, where there are joint owners the 3% applies if either of them has a second property. Or suppose that Jane’s grandmother died last year and in her Will left her house in equal shares to her 10 grandchildren but subject to a right for her husband to occupy the property for the remainder of his life. Jane is again caught. Because of this 10% interest in a house she has no ability to occupy, she will have to pay the 3% surcharge on her own first home.
Or take Mary. Mary married Mark when she was 18. It was a disaster. Mary eventually plucked up courage to leave her violent husband and fled with her infant child to a refuge. She is now 40, has rebuilt her life and is buying her first home. She has not seen Mark for 20 years. Mary will either have to pay the 3% or search out Mark to check if he owns a residence; only if he does not can Mary avoid the 3% surcharge. Mary would have avoided it if, when she left Mark, she had persuaded him to sign a formal separation agreement but, as she was scared for her life when she fled, she did not do this. For income tax and corporation tax purposes, a couple are not regarded as married if, like Mary and Mark, they are separated in circumstances that the separation is likely to be permanent. But Mr Osborne does not think that a reasonable approach to SDLT; a couple need to be separated under either a court order or a formal deed of separation.
The main residence exemption also has potential pitfalls. Firstly, the new residence must be bought within 18 months of the disposal of the old (or the old sold within 18 months of the purchase of the new). If the new residence is bought first, the 3% has to be paid up front then reclaimed back from HMRC. Thus, the SDLT on the purchase of a £500,000 house – a reasonable average in London – is £15,000 and the 3% surcharge would be an additional £15,000, meaning that the Purchaser would need to find £30,000 upfront, of which £15,000 would be repaid by HMRC if the new house is purchased within the 18 month timeframe allowed. Even the purchaser of a £100,000 house in the North of England (currently exempt from SDLT) would need to make a £3,000 forced loan to the government – potentially making the property unaffordable.
Finally, partnerships (including LLPs) are to be treated as transparent, i.e. the partners are treated as owning the partnership properties as joint owners. Overseas residences will also be regarded as a residence for SDLT – which, in countries where the concept of family property prevails – such as India – raises the question of whether or not a family member living in the UK has an interest in the family property in India in which his parents live. The answer is ‘probably’ – which means the 3% will need to be paid on any purchase of a UK residential property.
Some exceptions do exist – but they are few and far between. The purchase of mixed property (partly residential, partly commercial) attracts the commercial rate of SDLT on the entire price so the surcharge will not apply to the residential element. Similarly, the purchase of six or more residential properties in a single transaction attracts the commercial property rate of SDLT, while any property worth under £40,000, can be ignored completely.