SDLT- A Relationship Tax?

The changes to stamp duty (SDLT) last April were much publicised. 

Individuals purchasing second homes and buy-to-let properties now pay an additional 3% SDLT. It has clearly been a huge generator of revenue for the government, but the impact of the policy on certain individuals has been somewhat mixed. 

In my current role as head of New Business at MJP Conveyancing I am constantly fielding questions from prospective clients regarding their SDLT liability. 

For many there is a great sense of ambiguity about their individual liability, leaving for some a rather bitter feeling of injustice.

For the serial property investor the situation is however comparably straightforward. For each additional property they acquire they will be charged the higher rate. The shrewd will put their new assets under company names, or perhaps even the names of their children, to make the purchases more cost-effective. These clients understand their position, which makes it easier to advise them and answer their questions. The focus of this particular article is on a different category of prospective client.

The scenarios where we are finding most confusion, as well as frustration, are in cases like the one outlined below:

Client A owns one property, which has been her main residence since she purchased it for £250,000 in 2012.

Client A later gets married to (or enters into a relationship with) Client B and the couple wish to purchase their martial home for £500,000.

Client B owns no other property, but Client A wishes to retain her property as a source of rental income.

Under the current SDLT guidelines, client A and B’s new purchase will attract the higher rate.

Is this fair?

When approached by clients in such a position, their answer would resoundingly be ‘no’. In the eyes of the couple they are purchasing a ‘main residence’, but this is not a view shared by HMRC. It is a point that many of our clients find difficult to comprehend when they first come to us for a quote.

To avoid the additional 3%, Client A would need to sell her house either before purchasing the new marital home or within 36 months of completion in order to claim a refund. Her wish to retain the property she acquired while single as a source of rental income is therefore restricted. It is worth mentioning that this feels particularly harsh on Client B who has never owned a property before. It is certainly a potential barrier on his ability to climb the property ladder.

So we have a first-timer buyer (Client B) being hit with the extra 3%, which in parts of the country like London can amount to additional costs in the tens of thousands. We also have an individual who purchased an asset when single (Client A), but is then penalised fiscally for wanting to purchase a main residence with her partner. You could say a form of ‘relationship tax’.

Is change required?

Arguably yes.  

The answer to whether the serial property investor should be paying higher rates of tax is probably more linked to where your individual ideology lies on the political spectrum. But, should couples buying their first homes together be stung? Should an individual be penalised for acquiring an asset before the higher rate was introduced? For me the answer is no.  

Finding a solution that closes off as many loop-holes as possible, as well as satisfies the government’s perpetual desire for revenue, is however somewhat trickier. I am no tax expert, but one approach that appears sensible would be for individuals to be able to voluntarily pay the higher rate on their first property. This might seem like an odd approach to take, but it all centres on how often a couple’s future first home will be purchased for a greater amount. This is not too far removed from shared ownership purchases, where buyers are given the option to pay SDLT on the full market value rather than just their percentage share.

The above approach might work for individuals entering the property market for the first time, but it does not deal with the dilemma of Client A in our earlier scenario. Client A purchased that property prior to 2016, so would have been unaware that additional SDLT may be due in the future. In this instance, if Client A could retrospectively pay the higher rate on her first property, then the couple would save £20,000. Perhaps this is an approach that could both appease HMRC and offer some relief to the new couple.

In short, changes in fiscal policy always result in winners and losers. Individuals who want to retain a property they purchased when single, but also purchase with a new partner are perhaps in the ‘loser’ category.  While this may seem like a niche category, we should not forget how the rise of property prices has encouraged more people to buy their first home with friends to at least get a foot on the ladder. When one of the friends wishes to purchase a further property with their partner, you can begin to see how pressure to sell might soon create tensions and a whole variety of SDLT headaches.

While the prolific investor’s position will remain relatively clear in to the future, I expect to find more of our clients confused, hindered and ultimately frustrated by last year’s changes to SDLT. 

BEN PETT - TRAINEE SOLICITOR WITH MJP CONVEYANCING 

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at ben.pett@mjpconveyancing.com

Are you prepared for the Stamp Duty changes?

In his Autumn Statement this week, the Chancellor announced a 3 percentage point surcharge on stamp duty land tax (SDLT) for people buying a buy-to-let or second home from April 2016.  For example, on a home worth £275,000, SDLT would rise to £12,000 from £3,750. A significant jump. 

Below are some of the common questions raised along with some guidance though please do note that the legislation has yet to be implemented, and that there could be changes made to the proposals during the consultation process.  It is therefore important not to rely on this guidance without first checking with your conveyancer. 

Are there any exemptions?

The change will not apply to buyers of caravans, mobile homes or houseboats, nor, subject to a consultation, to companies or institutions owning more than fifteen residential properties.

When will this all happen?

1st April 2016

On what value of purchase will it apply?

Treasury documents released immediately after the speech suggested  that the first £40,000 would be tax free. It was however later confirmed that while purchasers who buy a property below £40,000 won’t have to pay the additional 3%, for all purchases above that, the 3% extra tax applies on the entire price. Currently, the rate for stamp duty is 0% on properties up to £125,000, then 2% on any sums over and above £125,000 to £250,000. Properties sold at £250,000 to £925,000 pay 5%, then it is 10% above that. These rates remain the same for standard residential buyers though 3% extra will be added if the property is to be used as a buy-to-let or second home.

If I have already exchanged contracts before the changes were announced will I be affected ?

If you have exchanged contracts on a property caught by these changes before the announcement was made,  but completion is on notice and there is a possibility you will complete after 1st April 2016, my view, having regard to how previous changes have been introduced, that  the increased surcharge is unlikely to apply. 

If I have exchanged contacts after the announcement but are due to complete the transaction after 1st April 2916 will I be required to pay the extra tax?

Probably yes, though there may be ways of avoiding this if you are able to gain possession of the property under license before completion, though do remember that if you are looking to do this there is a requirement to pay the Stamp duty within 30 days.  

There are other options  including the payment of 90% of the purchase price before the deadline or making the consideration partly rent and partly premium, and paying some rent before April.   The best advice is to speak with your conveyancer and seek advice. 

If I am thinking of purchasing a buy to let or second home what do I need to do to ensure that I do not have to pay the extra tax?

Putting it simply make sure you complete the transaction before the 1st April 2016. 

Think also about setting up a corporate vehicle to purchase the property.   Your solicitor or accountant will be able to advise you on what this involves.   Do keep in mind that if you have a property portfolio in your own name and are looking to transfer the ownership of existing properties into a limited company do ensure this is done before the 1st April 2016 otherwise the surcharge will apply to those transactions.  There could also be capital gain tax implications on which advice should be sought. 

Can I purchase the second home or buy to let in my husband or partners name?

I would not advise this as an option as I am sure the Revenue will be alert to this and make sure there is no gap in the legislation to allow this to happen.  There already exists legislation around 'connected persons' and I anticipate this will  be expanded upon to make sure this glaring and obvious situation does not become a loophole.  

What effect is this likely to have on the market?

This together with the recently announced changes to tax relief will make buy to let to the amateur landlord less attractive.  This could cause a shortage of rental properties and may lead to existing landlords pushing up rent.  Developers may also reign back on new builds if the demand for buy to let is no longer high. 

It could also lead to landlords offering to pay less for buy to rent properties and have the effect of making investment property cheaper. This my have been one of the intentions behind the change. 

It is likely that we will see a surge of purchases of this type of property before the deadline and this could in the interim force prices up if there is a mad rush

What should I expect from my conveyancer?

If there is a rush your conveyancer may find it difficult to cope with the large number of cases and may decide in an effort to control the large flow of work to increase fees for this type of work. I read recently that it is estimated as many as  50,000 buy to let transactions could be rushed through before the deadline. 

Clearly it is important to make sure your conveyancer is aware of the purpose of the transaction  and the need to complete before 1st April next. Your conveyancer may be reluctant to give a guarantee and require you to pay the fee irrespective of whether it completes in time. 

Where are the grey areas?

What is the position when a spouse or cohabiter breaks up with a partner and still has an interest in the jointly owned property.  Does the purchase of alternative accommodation count as a second home. Likewise where a property is purchased due to short term relocation for work where the existing property has yet to be sold. 

Hopefully the details will be ironed out once the consultation process is concluded and the legislation is passed.  Until then all you do is to work with what is known and to keep the deadline of the 1st April firmly in mind. 

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at david@mjpconveyancing.com