Higher rates of SDLT on additional residential properties
ICAS has responded to the consultation on implementing the higher rates
Susan Cattell, Head of Taxation (England and Wales) outlines the ICAS response to the government consultation on the higher rates of SDLT on purchases of additional residential properties
In the Chancellor's Autumn Statement on 25 November, 2015 it was announced that higher rates of Stamp Duty Land Tax (SDLT), at 3 percentage points above the current rates, would be charged from 1 April, 2016 on purchases of additional residential properties (above £40,000), such as buy-to-let properties and second homes. A summary of the proposals can be found here.
The intention behind the increased rates is to support home ownership and first time buyers. However the proposals are highly complex and ICAS has expressed concern that there may be unintended consequences. Landlords affected by these changes and other forthcoming changes to the tax treatment of property, such as the restriction of interest relief for unincorporated property businesses may seek to increase rents. In the short term blockages may be created in the housing market.
The consultation proposed a ‘simple’ approach to joint purchasers. If any of the joint purchasers in a transaction are purchasing an additional residential property and not replacing a main residence, the higher rates will apply to the whole transaction value. This may be simple but it is also clearly unfair to those purchasers in a joint transaction who do not already own a residential property. It may be a deterrent factor for some individuals who are buying with assistance from a family member, where the family member already owns another property. The family member’s contribution to the joint purchase may be relatively small but the entire value of the transaction will be subject to the higher rates. This would appear to conflict with one of the stated aims of the changes which is to help first time buyers. A fairer approach would be to charge the higher rate only on the proportion relating to the purchaser(s) who already owned another property.
Only or main residence
The higher rate of SDLT is not intended to apply where a purchaser is replacing their only or main residence. The concept of only or main residence is already used in the capital gains tax regime. However there are some differences between the approach for CGT and the proposed approach for SDLT. In particular for CGT purposes where an individual or a married couple/civil partnership own more than one residence an election can be made for one of the properties to be treated as the main residence. Such an election for SDLT is specifically ruled out in the proposals.
The ICAS response urges that this should be reconsidered to avoid uncertainty and the potential for disputes with HMRC. For example: an individual (or a married couple/civil partnership) might own a property in the town where they work and another home in the countryside. Using the factors noted in the consultation, which are similar to those used for determining the main residence for CGT, there could be indicators pointing to either property being the main residence. For CGT this could be resolved by an election; for SDLT, when one of the properties is disposed of, it may be unclear whether it is the main residence which has been disposed of or not.
Gap between sale and purchase of a main residence
The consultation suggests that 18 months is a reasonable length of time to allow purchasers between the sale of a previous main residence and purchase of a new one. In general this is likely to be the case. However ICAS has suggested that there could be some flexibility in certain circumstances:
- Where the sale of the previous residence is delayed by unexpected factors which arise after a commitment to buy the new residence has been made, for example, planning blight or flooding. ICAS suggests there could be scope to allow an extension of the period in exceptional circumstances.
- Where someone who owned a main residence and, say, a holiday home and had already sold their main residence before the announcement of the proposed higher rates of SDLT in the Autumn Statement ie at a time when they did not know that there would be an 18 month period to purchase a new main residence to avoid the higher rates. There could be a transitional rule for these purchasers to allow the 18 month period to start, not on the date of the sale of the previous residence, but either the date of the Autumn Statement or from 1 April 2016.
- Where internationally mobile workers leave the UK for an overseas assignment lasting more than 18 months.
Refunds of SDLT where two properties are owned temporarily
It will often be the case that the sale of the previous main residence and purchase of the new one cannot take place on the same day; there may be a short period when two properties are owned and therefore the purchaser is within the scope of the proposed additional rate. The consultation proposes that purchasers pay the higher rate of SDLT and then claim a refund when the previous main residence is sold.
It would be unrealistic to defer collection of the additional SDLT until 18 months has elapsed. However the proposed approach is likely to place considerable strain on some purchasers, especially where the delay in the sale arises unexpectedly perhaps due to the last minute breakdown of a chain. There could be significant cash flow issues for purchasers already taking on bridging loans and fees.
Additionally as the consultation document notes the number of refunds of SDLT is currently small. A new online system is proposed – with consultation on the design of the refund process. ICAS is concerned that it will be very challenging to have this process in place in time for the introduction of the higher rates from 1 April 2016, particularly as other major IT projects are currently being undertaken by HMRC. Some purchasers are likely to have cash flow problems so it is important that the refund system works effectively, with refunds made promptly, right from the start.
Properties owned anywhere in the world
SDLT can only apply to the purchase of property in England, Wales and Northern Ireland. However in determining whether the higher rates will apply property owned anywhere in the world will be taken into account. This may be an issue for some internationally mobile workers (and their employers) coming to work in the UK. They might wish to retain their residence in their home country to return to after the UK assignment. If they then purchase a property in the UK, which is occupied as their main residence whilst they are working in the UK, it will be a second property and subject to the additional rates of SDLT.
The ICAS response also considers the proposals for possible exemptions for bulk purchasers and notes the absence of any specific exemption for property developers.