Higher rates of tax on property purchases imminent – LBTT and SDLT
The Chancellor announced in his Autumn Statement in November 2015 that he was introducing new rates of Stamp Duty Land Tax (SDLT) on purchasers of buy to let properties or second homes. At the end of December the government launched a consultation paper which revealed the proposed details of the regime.
SDLT applies to land transactions in England, Wales and Northern Ireland. Land and Buildings Transaction Tax (LBTT) applies to land transactions in Scotland.
This letter summarises the proposals that were contained in the consultation paper on SDLT and the LBTT Bill.
The new rates came into effect for completions on or after 1 April 2016.
Many commentators understood the Chancellor’s argument that ‘people buying a home to let should not be squeezing out families who can’t afford a home to buy’. Few perhaps realised how much more complicated property transactions may well be as a result. There will be some purchasers who will have to pay the additional charge even though the property purchased will not be a buy to let or a second home
What are the additional charges?
If a purchaser falls within either of the regimes, the SDLT and LBTT additional charges are 3% on the full price and so the charge on a property costing £200,000 increases by £6,000. If not caught by the new regimes the charges would be SDLT £1,500 (2% on £200,000 – £125,000) and LBTT £1,100 (2% on £200,000 – £145,000).
There is an exception from the charges for transactions under £40,000.
When does the additional charge apply?
The higher rates apply to all purchases of residential property on or after 1 April 2016.
The additional charges potentially apply if at the end of the day of the purchase transaction the individual owns two or more residential properties. Married couples are to be treated as one unit. This means that if Mr A owns the property in which Mr and Mrs A live, and Mrs A wants to buy another property (for whatever reason), the purchase will be subject to the additional charge.
In Scotland, the LBTT Bill treats cohabitants (those living as if a married couple), along with their dependent children, as one unit.
There is an exemption if the purchaser has sold their main residence and purchased a property which is to be their new main residence. However if purchasers have been unable to sell their previous main residence by the end of the day of the transactions they will be subject to the additional charge. A refund will available but only if the previous main residence is sold within 18 months.
The exemption also applies if the former main residence is sold before a new main residence is purchased as long as the gap between the two transactions is less than 18 months.
Where a person has more than one residence in which they live, it will be a question of fact which of the properties is the main residence.
There are other scenarios in which the additional charge will apply even though the purchase is of a property which is not a buy to let or a second home.
Please note that SDLT and LBTT are self-assessed taxes and therefore purchasers are responsible for the accuracy of any returns made under these taxes.
Examples where the charge will apply
The following are scenarios in which the additional charge will apply even though the purchase is of a property which is not a buy to let or a second home.
H owns a main residence. He is purchasing a new main residence, but rather than selling his previous main residence he will rent it out. At the end of the day of the transaction H owns two properties and is not replacing a main residence (as he is not selling his previous main residence), so the higher rates will apply.
M owns one residential property. He decides to purchase another property jointly with his daughter. The property will be his daughter’s first property. At the end of the day of the transaction, M owns more than one residential property and has not replaced his main residence, so the higher rates will apply.
What if instead M gave his daughter money towards a deposit and acts as a guarantor on the mortgage, but will not jointly own the property with her? As at the end of the day of the transaction the daughter will own only one property, the higher rates will not apply.
Example 3 – married couples ‘living apart’
It is proposed that married couples and civil partners are treated as one unit, unless they are separated under a court order or by a formal Deed of Separation executed under seal. So if Mr C leaves the family home and quickly purchases a flat in which he is going to live, the additional charge will apply on the purchase.
Examples where the charge will not apply
Purchase of own residence exemption
O is a buy-to-let investor with 10 residential properties in his portfolio. He also owns one residential property which he uses as his main residence. He sells his previous main residence and purchases a new main residence on the same day.
Despite owning 11 properties, he will not pay the higher rates of SDLT as he has replaced his main residence.
If you would like further information on the proposals, please contact us or download the consultative document from HMRC.