The UK government (the government) published its promised consultation on the proposed additional 3% rate of Stamp Duty Land Tax (SDLT) for acquisitions of additional residential properties in England, Wales and Northern Ireland on 28 December 2015. In this note we consider the main proposals for the new charge detailed in the consultation.

In his Autumn Statement in November 2015, the UK Chancellor announced an increase in the rate of SDLT that will be paid from 1 April 2016 on purchases of additional residential properties in England, Wales and Northern Ireland valued over £40,000. These would include buy to let properties and second homes.

Purchasers of such properties will pay an additional 3% SDLT above the rates they would have paid under the existing rules. With the current top rate of SDLT for individuals acquiring residential property at 12%, this will result in purchasers paying rates of up to 15% on affected properties when the new rules take effect. (We understand that HMRC have confirmed that where companies and other non-natural persons are already liable to pay higher rate SDLT at 15% on residential property purchased, the additional 3% rate will not be payable).

Purchasers of property in Scotland no longer pay SDLT following the introduction of Scotland's Land and Buildings Transaction Tax (LBTT) on 1 April 2015. However, the Scottish government is proposing to mirror the Chancellor's additional 3% rate for acquisitions of residential property in Scotland. The details of this proposal are beyond the scope of this note.

HM Treasury published its promised consultation on the SDLT policy detail on 28 December 2015, and in this note we consider the main proposals for the new charge detailed in the consultation.

However, it is clear from several of the consultation questions that the government is still at an early stage in its thinking in relation to a number of the measures and, as such, the final rules may look significantly different from the initial proposals.

Summary of principal proposals

  • The additional 3% rate of SDLT will not apply to any property acquisition where contracts were exchanged on or before 25 November 2015 (the day of the Autumn Statement) even if the transaction is completed on or after 1 April 2016.
  • The additional rate will apply to relevant transactions where contracts were exchanged after 25 November 2015 if the transaction is completed on or after 1 April 2016.
  • The additional rate will only apply to purchases of additional properties - individuals or couples buying their first home or replacing one main residence with another (even if one or both of them also own one or more additional properties) will not be affected.
  • Equally, an individual or couple purchasing a property which they intend to let out, or which will be a holiday home, for example, will not be caught by the additional rate provided it is the only property they own at the end of the day of the transaction, e.g. someone living in rented accommodation who purchases a buy to let property or holiday home or, who sells such a property and replaces it with another on the same day will not be liable to the additional rate.
  • The government produced a useful flow chart, based on its current proposals, to assist with determining whether the additional rate would apply, as follows:

  • It will not be possible to elect for property to be treated as a main residence. That will be a question of fact taking into account a number of factors.
  • Foreign property owned by a person acquiring residential property in England, Wales or Northern Ireland will be taken into account in determining whether the additional rate of SDLT is payable on that acquisition.
  • Married couples and civil partners will be treated as a single unit for the purposes of determining if the additional rate is due on an acquisition of residential property.
  • Trusts and settlements - acquisitions of residential property will be treated, as follows:
    • an acquisition by bare trustees will be treated as a purchase by the underlying beneficiary directly;
    • for the purposes of determining whether the additional SDLT rate is due, an acquisition of residential property made by the trustees of a settlement for beneficiaries with life interests or interests in possession will be treated as if it was made by the individual beneficiary themselves;
    • the additional rate of SDLT will be due on any acquisition of residential property over £40,000 by the trustees of other trusts (e.g. discretionary).
  • Companies and collective investment schemes will be liable to the additional rate of SDLT on all acquisitions of residential property over £40,000, even a first acquisition, subject to any available relief.
  • Exclusions and reliefs:
    • acquisitions of non-residential property and mixed use transactions (where residential and non-residential properties are purchased together in a single transaction and treated as non-residential transactions for SDLT purposes) will not be liable to the additional rate.
    • Where multiple dwellings are purchased in a single or linked transaction, that transaction is eligible for multiple dwellings relief (MDR) where SDLT is calculated according to the average value of the properties rather than on the total value of the transaction. The rate due will be calculated including the additional rate of SDLT where relevant.
    • Large scale investors - the consultation proposes that bulk acquisitions of at least 15 residential properties in one transaction should not be liable to the additional rate. This relief may be available to both individuals and corporate purchasers. Alternative options for exemption are being considered. 

Detail of the principal proposals

Main residence determination

  • It will not be possible to elect for property to be treated as a main residence. It is intended that this should be a question of fact. Factors which HMRC will take into account in determining this include the following:
    • the correspondence and registration addresses given to various organisations.
    • the location and degree of furnishing and location of moveable possessions; and
    • where the individual works;
    • at which residence the individual is registered to vote;
    • if the individual has children, where they go to school;
    • where the individual and their family spend their time;
  • The government is proposing that there should be a two stage test to determine whether a purchase of a residential property is a replacement of a main residence or not, as follows:
    1. whether, at the time of the transaction, a property sold in the last 18 months was the only or main residence of the individual;
    2. whether the purchaser of the new property intends to occupy that property as their only or main residence.

Where an individual owns more than one residence, which of these is their main residence will be a question of fact, based on the factors above.

Foreign property

  • The government intends that owners of another residential property outside of England, Wales and Northern Ireland should also be liable to the additional rate of SDLT in appropriate circumstances. Accordingly, if an individual owns a property outside England, Wales and Northern Ireland, and acquires another within any of those jurisdictions, they will be liable to the additional rate of SDLT on the new purchase. As discussed above, it is likely that similar rules will apply for LBTT in relation to property acquisitions in Scotland.
  • As in other circumstances, the additional rate will not apply if the new property is being purchased as a replacement for a previous main residence which is being sold, or has been sold within the last 18 months. The additional rate will also not apply if, at the end of the day in which the new property is purchased, the purchaser owns only one property worldwide.

Types of purchaser

Trusts and settlements
  • The government is concerned that trusts could be used as vehicles to hold property to avoid the additional rate of SDLT. Accordingly, it is proposing that beneficiaries with a life interest or interest in possession under a trust should be treated as if they have an interest in a residential property held by the trustees.
  • Other interests in trusts holding residential property, such as an interest in remainder (that a beneficiary will only receive on the termination of the initial life interest) or a discretionary interest, where a beneficiary only has a right to be considered for benefit, will not be considered in determining whether an individual has an interest in a residential property for the purpose of the additional SDLT charge. However, purchases of residential property by trustees of trusts with no interest in possession will be liable to the additional rate of SDLT.
  • For the purposes of determining if the additional SDLT rate is due, a purchase of residential property by the trustees of a bare trust will be regarded as a purchase by the beneficiary of the trust directly.
Married couples and civil partners
  • The government intends to treat married couples and civil partners as a single unit for the purpose of the additional SDLT rate, unless their relationship has broken down and they are separated under a court order or a formal Deed of Separation executed under seal.
  • Thus, a couple may own one main residence between them at any one time, and any additional residential property owned by either of them will be relevant in determining whether an additional property is being purchased. In a situation where a couple sometimes lives apart, the property that is their main residence will have to be determined by the facts, as discussed above.
Joint purchasers
  • In the case of joint purchasers, the government is proposing that if at the end of the day of a transaction, any of the joint purchasers has an interest in two or more properties and is not replacing a main residence, the higher SDLT rate should apply to the entire consideration for that transaction. The government is seeking views on whether this is the appropriate treatment in this situation, given that for one or more of the other joint purchasers, the transaction could be an acquisition of a first property.
Partnerships
  • Partnerships will be treated as joint purchasers of property for the purposes of the additional rates of SDLT, as they are for other SDLT purposes. We understand that the government are open to considering reliefs and exclusions where this treatment may give rise to adverse effects on businesses, particularly small and medium sized enterprises (SMEs), such as farming partnerships.
Property purchased for children
  • If parents purchase a property for their children to live in, the additional rate of SDLT may apply depending on the structure of the transaction and who will own the property. If at the end of the day of the transaction, the individual or couple that acquires an interest in the property also owns another property and they are not replacing their main residence the additional rate of SDLT will apply.
  • Accordingly, if parents purchase a property for their child to live in, and also have one or more additional properties, the additional SDLT rate will apply. If a parent acquires a property jointly with their child, and also owns another property, the additional SDLT rate will apply. However, if a parent gives money to a child to purchase a property, but the child will own the property, even if the parent is a mortgage guarantor, the additional rate will not apply, provided the child does not also own an additional property. We understand that the government are considering an exclusion for de minimis equity interests to allow for situations where mortgagees require the parent to take an interest in the property in order to be a mortgagor for security purposes.

Timing issues

Overlap of purchase and sale
  • If an individual or couple intend to move from one main residence to another but complete their purchase of a new main residence before their sale of the old one, (e.g. where a property chain breaks down) the consultation indicates that they will be liable for the additional rate of SDLT on the new purchase. However, if the previous main residence is sold within 18 months, a refund of the additional 3% SDLT paid will be available.
  • The government appreciates that paying the additional tax and claiming a refund may be burdensome to taxpayers. We understand that it is also concerned about the additional administration for HMRC of processing such refunds. Accordingly, it is requesting views as to whether the test for whether someone owns one, or more than one, residential properties should be carried out at the time of submitting the SDLT return rather than at the end of the day of the transaction. Under the existing rules, an SDLT return is due within 30 days after the day of completion of a property acquisition. (However, the government is planning to consult this year on changes including a possible reduction in this period from 30 to 14 days, with a view to such changes coming into effect in 2017 to 2018.) The government is also considering options to avoid the need for a payment of the additional rate and refund in wider circumstances provided that a way to police such a relief can be found.
Delay between sale and purchase
  • In certain circumstances, there may be a delay between a sale of one main residence and a purchase of a replacement. In this situation, provided a new main residence is acquired within 18 months of the disposal of the previous one, the higher rate of SDLT will not apply.

Exclusions and reliefs

Non-residential property and mixed use transactions
  • The additional rate of SDLT will apply only to purchases of residential property. There is to be no change to the existing definitions of residential and non-residential property. A purchaser of non-residential property will not pay the additional rate even if the property is later converted to residential use.
  • Non-residential property includes the following:
    • Commercial property (e.g. shops or offices);
    • A mixed use property (one with both residential and non-residential elements).
    • Six or more residential properties bought in a single transaction; and
    • Any other land or property not used as a residence;
    • Forests;
    • Bare land (even if it may be used later for residential purposes);
    • Agricultural land;
  • Mixed use transactions, where residential and non-residential properties are purchased together in a single transaction, are treated as a non-residential transaction for SDLT purposes. The government does not intend to change that treatment.
  • SDLT on non-residential transactions, or mixed use transactions, is paid on the entire purchase price at 4% for properties over £500,000.
Multiple residential property purchases
  • Where multiple dwellings are purchased in a single or linked transaction, that transaction is eligible for multiple dwellings relief (MDR).
  • Under MDR, the residential SDLT rates are applied to the average price of each property, multiplied by the number of properties purchased rather than to the total value of the transaction. This way, the overall SDLT paid will be closer to that which would have been paid if the properties had been purchased separately.
  • If six or more properties are bought together, the purchaser can choose whether MDR should apply to the transaction, calculated including the additional SDLT rate where relevant, or the non-residential SDLT rate, which will be charged on the full purchase price.
  • As an example, in a transaction involving 10 properties purchased for £3 million, with an average purchase price of £300,000, applying MDR with the additional rate will result in SDLT of £14,000 per property, £140,000 in total. In contrast, if the purchaser chooses to pay the non-residential SDLT rate, at 4% on the total acquisition cost, this will give rise to SDLT of £120,000. This reverses the existing position where the application of MDR at current residential SDLT rates would have resulted in a total SDLT rate of £50,000.
Charities and registered social landlords
  • Certain residential property transactions made by charities and registered social landlords are exempt from SDLT under existing rules. It is not proposed that charities and social landlords will be brought into the higher rates of SDLT in circumstances where they would currently be exempt.
Large scale investors
  • The new additional SDLT rate is targeted at buy to let investors and purchasers of second homes who may impact on others' ability to get on the property ladder. The government does not want to target investment that results in an overall increase in housing supply and it takes the view that an exemption from the additional rate for investments that may give rise to significant development may be appropriate.
  • For bulk purchase of multiple completed units, MDR is available, but the rate paid will include the new additional rate. Alternatively, a purchaser of six or more residential properties may choose to pay non-residential rates, as appropriate.
  • While the consultation is not entirely clear on this point, it appears that it is proposing an additional exemption to sit alongside MDR, whereby certain bulk purchases of off-plan and other residential properties may be exempt from the additional rates altogether.
  • The proposal made at the time of the Autumn Statement was that an exemption from the additional rate might be available to corporates and funds with an existing portfolio of at least 15 properties at the time of the transaction. In contrast, the suggestion in the consultation is that such an exemption might be targeted at the bulk purchase of at least 15 residential properties in one transaction, and might be available to both individuals and non-natural persons. This is on the basis that that an exemption by reference to significant investment may be better targeted to assist the government's housing objectives than one given by reference to an investor's existing portfolio. The government is seeking views on this issue. However, our understanding is that it is considering the possibility of an exemption for diversely-held entities similar to that available under the rules for non-resident capital gains tax, rather than focussing on bulk purchases.

Anti-avoidance

First purchases of residential property by a company or collective investment vehicle
  • The consultation indicates that, unlike individuals, companies or collective investment schemes (CIS) will be liable to the additional rate of SDLT on all purchases of residential property of £40,000 or above, including the first such purchase.
  • This is to prevent individuals potentially avoiding the additional 3% rate by acquiring additional properties through a company or CIS.
  • The higher 15% rate of SDLT becomes payable on the entire acquisition price for higher value properties acquired by companies and other non-natural persons otherwise than for certain business purposes.
  • While the consultation is not clear on the point, we understand that it has subsequently been confirmed by HM Treasury and HMRC that the additional 3% rate of SDLT will not apply to acquisitions where higher rate SDLT at 15% is payable.

Planning considerations

  • Clearly, anyone who is considering an acquisition of residential property as a second home or investment property would be well-advised to complete the acquisition prior to 1 April 2016 where this is possible in order to avoid the additional rate of SDLT.
  • In percentage terms, the additional rate will be far more significant relative to the overall SDLT cost on lower value properties. As an example, on a property valued at £200,000, SDLT paid at existing rates would be £1,500. If the additional 3% rate is due, the SDLT rises to £7,500, an increase of 400%. On a property of £2 million, on the other hand, SDLT at existing rates would be £153,750. With the additional 3% rate, the charge would rise to £213,750, an increase of 39%. The percentage differential reduces further the higher the value of property purchased, and would be approximately 26% at £20 million.
  • This makes sense given that the charge is primarily targeted at buy to let investors and second home buyers who are seen to be competing with first time buyers and preventing them from getting on the property ladder.
  • For property buyers who are more focussed on investment rather than purchasing a residence it may be more cost-effective to consider investing in multiple purchases of six or more properties in the same transaction. In that way, the non-residential SDLT rate of 4% will be available. For higher value properties, paying this rate may be preferable to paying residential rates even with the benefit of an exemption from the additional 3% rate such as is proposed for bulk investments of 15 or more properties if this is introduced.
  • Alternatively, it will continue to be possible to invest in all forms of property through widely-held corporate funds and REITs. However, unless an exception is made for diversely-held funds as is being considered, such funds may become liable to the additional charge on residential property acquisitions in certain cases. This may impact to some extent on their attractiveness.

Conclusion

The additional rate will have a potentially punitive effect on all acquisitions of additional properties, but especially those at the lower end of the market. For trustees and beneficiaries, the proposals are particularly unfortunate, as trustees of discretionary trusts and others without a life tenant will be liable to SDLT at higher rates regardless of whether the property is the first acquired by the trust.

For beneficiaries with an interest in possession, the existing proposals will have implications on their personal property acquisitions which are unlikely to be desirable, or even fair in many cases.

It is unclear as yet whether there will be any relief for trusts for vulnerable people, whether minors or adults, unless those individuals are living in the property as their only or main residence. It is hoped that the government will consider this issue further.

For corporate entities or other collective investment schemes, the additional rate will make acquisitions of residential property even more expensive in the future, at least where higher rate SDLT at 15% is not already payable. This makes the scope of any exemption for bulk purchases or diversely held funds (which are being considered) particularly important.

The consultation period is very short, a total of five weeks, the first of which was during the New Year holiday period. We will report further on the proposals as they develop following consultation and once draft legislation is published, likely to be on or after 16 March 2016, the day of the UK Budget. In the meantime, individuals who are considering an acquisition of residential property in England, Wales or Northern Ireland should take advice on the potential implications as soon as possible.