Will you pay 3% more on moving house?
Many taxpayers will have to pay the 3% SDLT supplement on moving house, explains Donald Drysdale.
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.
This sounded simple enough. However, a consultation document published by the Treasury on 28 December has revealed startling complexities. Detailed proposals for determining what is an ‘additional residential property’ go far beyond what most taxpayers would have expected.
According to Treasury estimates, an astonishing 10% of all residential property transactions in England, Wales and Northern Ireland are likely to be affected. In Scotland there is to be a similar 3% supplement on Land and Buildings Transaction Tax (LBTT) rates but detailed proposals have not yet been published.
The cost of the 3% supplement, when it applies, will be substantial. On an average English house price of £286,000 it effectively trebles the SDLT, from £4,300 to £12,850. On an average London house price of £531,000 it virtually doubles the tax from £16,550 to £32,480.
ICAS plans to respond and all readers, including ICAS members, ICAS Tax Professionals (ITPs) and students, are invited to submit their views.
The new measure will be included in the Finance Bill 2016, expected to appear around 24 March, but no draft clauses have yet been published. Instead, the Treasury’s 30-page consultative paper sets out its policy proposals.
The Treasury consultation closes on 1 February. ICAS plans to respond and all readers, including ICAS members, ICAS Tax Professionals (ITPs) and students, are invited to submit their views by e-mail to firstname.lastname@example.org.
Replacing your main residence
If you buy a residential property in England, Wales or Northern Ireland and on completion of the transaction you own only one residential property anywhere in the world, the supplement will not apply.
If on completion you own two or more residential properties worldwide, there is a strong likelihood that the supplement will be payable. If the acquisition replaces your main residence sold more than 18 months ago, the supplement will apply. If you still own the previous main residence which you plan to replace, the supplement will have to be paid, but it may be reclaimed if the previous main residence is sold within the next 18 months. Only if the acquisition replaces your main residence sold within the previous 18 months will the supplement not be payable.
These proposals raise significant problems.
First, if you want to buy your replacement main residence before selling your existing home, you’re going to have to lay out the extra 3% tax (albeit perhaps temporarily) at a time when your finances may already be overstretched and perhaps propped up by expensive bridging.
The Treasury assumes that most people sell and buy on the same day – a not uncommon event where ‘property chains’ exist. Unfortunately, the property market doesn’t always work that way
Second, to avoid the supplement as a permanent cost on simply moving house, you’re going to have to sell and then buy (or buy and then sell) within 18 months. The Treasury assumes that most people sell and buy on the same day – a not uncommon event where ‘property chains’ exist. Unfortunately, the property market doesn’t always work that way. It can easily take longer than 18 months to sell your home or find your next one. Either way, you may get caught short.
Third, if you’ve been living in rented or employer-provided accommodation (perhaps while working overseas) and you’ve owned buy-to-let property simply to stay on the property ladder, you don’t own a main residence to replace. Accordingly your acquisition of your main residence will attract the supplement, unless you sell all other residential properties first.
Relevance of your marital status
Married couples or civil partners (unless formally separated) will be treated as one for the purposes of the supplement. They can only own one main residence between them at any one time, and property owned by either partner or any minor children will be relevant when determining whether an additional property is being purchased.
By contrast, unmarried partners will each be able to own a main residence before any additional purchase is caught by the supplement. However, we don’t yet know for sure how ‘main residence’ will be defined for this purpose; we do know that individuals won’t be able to elect which of two or more residences is their main residence, so the treatment of a main residence for the SDLT supplement may differ from the treatment for capital gains tax.
Joint purchasers, including unmarried couples, will pay the supplement if the purchase results in any of them having two or more properties without replacing a main residence, regardless of the extent of their interest in either property.
Taxpayers who would have bought student flats as the least costly option for adult children at university will need to consider how best to structure such arrangements. The alternative of guaranteeing loans to enable the children to buy property is not always acceptable to lenders.
Purchases by trustees for beneficiaries with life interests or interests in possession will be treated as though made by the beneficiaries themselves. Other trustee purchases will attract the supplement.
A purchase of a non-residential property or a mixed use transaction will never attract the supplement, even if the property is later converted for residential purposes.
There are no plans to charge the higher rates of SDLT on charities or registered social landlords in circumstances in which they would usually be exempt.
There is likely to be an exemption from the supplement for large scale investors whose activities support the government’s wider housing strategy.
For purchases of six or more residential properties in the same transaction, the purchaser will be able to choose whether multiple dwellings relief, with the higher rates, will apply, or the non-residential rates (which will be charged on the total purchase price).
There is likely to be an exemption from the supplement for large scale investors whose activities support the government’s wider housing strategy. The Treasury is seeking views on whether an exemption from the supplement should be targeted at bulk purchases of at least 15 residential properties in one transaction, and whether this should be available to individuals as well as non-natural persons.
If these proposals are implemented from 1 April, 2016 as expected, even the simple replacement of one main home with another may become a minefield of SDLT traps for the unwary. Taxpayers may find their finances under additional pressure at a time when they are already overstretched. The incidence of SDLT will differ between married and unmarried taxpayers, and will depend upon vagaries of the housing market. SDLT is already a deterrent to mobility of labour, and this is likely to become worse.
In late 2014 the government radically reformed SDLT on residential properties, abolishing the old ‘slab’ structure and introducing progressive rates bands to make the system fairer. By contrast, the new 3% supplement introduces unwelcome complexity and unfairness, and promises to create new compliance challenges for taxpayers and HMRC.
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