SDLT is 15 years old – so what’s changed?
It is usually the transition period of change that causes the most confusion and scepticism. But, in the case of stamp duty land tax (SDLT) which replaced stamp duty in 2003, its complexities, and the challenges created by HMRC’s interpretation of the relevant legislation, have only grown.
On 1 December 2003 stamp duty on the purchase of property was replaced by stamp duty land tax. Until 2011, the top rate of tax was 4% whatever the nature of the property. Buy a parade of shops or house in Mayfair for £5m and the tax was the same – £200,000.
Today, both are taxed on a progressive basis, where the rate of tax increases as the price increases. The shops will be taxed at the non-residential rate – £239,500 (4.79%) whereas the house could be taxed at the surcharged residential rate – £663,750 (13.275%). Residential rate applies not just to a dwelling but also to its garden and grounds.
The cheaper non-residential rate applies where a purchase is not wholly residential, such as a shop with a flat above. This has led to some avoidance schemes, such as buying a flat in Chelsea and a field in Cornwall in the same transaction. That does not work, as the rate of tax is based on the “main subject-matter” of the deal, which is obviously the flat.
What about a country house in 5 acres of garden and grounds that is acquired with a further 50 acres of farm land? Up to mid-2017 that would have been taxed as mixed-use. However, a small number of tax returns are routinely checked by HMRC, and last year it started checking mixed-use returns where the price was over £1m or so – and rejecting them. Why?
It claims that all land acquired with a house is part of its grounds, so taxed as residential property if acquired with vacant possession and therefore available for the buyer to use. Previous use (for farming or equestrian purposes, for example) is ignored; as are its size (we’ve had an area approaching 200 acres being treated as “grounds”); the fact it is fenced off; and even the presence of animals grazing unless before, on and after completion of the transaction there is a written tenancy or grazing agreement with a third party.
It is almost certain that HMRC’s view is incorrect. It is ignoring its own issued guidance, which states that the grounds of a dwelling is land “needed for its reasonable enjoyment”. A large house may need large grounds but few houses need acres of farm land.
We still advise clients to claim mixed-use treatment in appropriate cases, but warn that HMRC may reject that claim and substitute residential rates. This extra tax would need to be paid unless the buyer were prepared to fund the costs of an appeal, which might be far more expensive than the tax at stake.
26 November 2018 – a critical date
On 25 November 2015 the Chancellor announced a 3% surcharge on additional homes and on all dwellings bought by non-human buyers, such as companies. Just two exemptions from surcharge are available, and only for human buyers. One is that at the end of the day of completion, the only dwelling that the buyer (and certain other people connected with the buyer) owns is the one just bought.
The second exemption is where the buyer “P” is replacing his or her main home. It does not then matter if P already owns a thousand other dwellings – the purchase of the new home is exempt from surcharge. There are two forms of this exemption, which we will call A and B.
Exemption 2A applies where P disposes of the old home before buying the new home. Five conditions must be met:
- P must intend the new dwelling to be P’s new main home.
- P (or P’s spouse or civil partner at the time) must have previously disposed of an interest in “another” dwelling – it does not matter how long ago that was.
- As a result of that disposal neither P nor P’s spouse or civil partner kept any interest in that other dwelling.
- P must have lived in that other dwelling as P’s main home – at some time in the past.
- Between the date of the disposal of the old home and the purchase of the new one, neither P, nor P’s spouse or civil partner, has bought another dwelling as P’s main home.
No time limits initially applied to conditions (2) and (4), but as from 26 November 2018 P can look back only three years. On the day of completion of the new home, the disposal of the “other” dwelling must have occurred within the previous three years and at some time in those three years that other dwelling must have been P’s main home.
These time limits work harshly where buyers have been working away from home.
Jenny lives in a London flat and also has a country cottage. Her firm sends her to its Leeds office for 3 years, so Jenny lets her London flat and lives in a rented accommodation. After 3 years her company relocates to Leeds, so Jenny sells her flat and buys a house in Leeds.
Jenny must pay surcharge. Exemption one does not apply as on the day she completes her Leeds purchase she still owns her cottage. What about exemption 2A? On completion day:
- She intends the new house to be her main home.
- In the previous three years she disposed of her London flat.
- She did not keep any of it.
- Between disposal and purchase she did not buy any other dwelling.
But condition (4) is not met. Jenny has not lived in her London flat as her main home at any time during the previous three years.
Could Jenny give notice to her tenant and live in her London flat before she buys the Leeds house? Yes, but that would not turn her flat into her main home unless she quite literally moved back to London, not only relinquishing her Leeds accommodation and taking all her belongings back, but issuing change of address notices to everybody, changing her doctor and dentist, going back on the London electoral roll etc. Even then, HMRC might question why she had done it when her place of work was in Leeds and she was about to buy a new house in Leeds. Was she by any chance merely doing it to avoid paying surcharge? On top of which, the cost of two removals (to London, then back to Leeds) could be more than the surcharge.
Exemption 2B applies where P buys the new home before disposing of the old one, perhaps while works are carried out on the new home. Surcharge is payable, but may be reclaimed if four conditions are met:
- P intends the new dwelling to be P’s new main home.
- Within 3 years of completing the purchase of the new home, P (or P’s spouse or civil partner at the time) disposes of an interest in “another” dwelling.
- After that disposal neither P nor P’s spouse or civil partner has any interest in that other dwelling.
- At some time in the 3 years before completing the purchase of the new home, P lived in that other dwelling as P’s main home.
These 3-year time limits have been in force from the start, but in guidance on its website HMRC nearly always omits condition 4 – as Tom and Sara (not their real names, nor clients of ours) learned to their cost.
Tom met Sara in 2012. He was living in a bachelor flat, far too small for them both, so they lived together in rented accommodation. Tom could not sell his flat, so rented it out. In 2017 they bought their first home.They knew they had to pay surcharge, but the website said they could reclaim it if Tom sold his flat within the next three years. Just to make sure, Tom rang the official helpline and was told the same story. They bought the house but when, after he sold the flat, they claimed a refund of surcharge, the claim was rejected.
When property is bought jointly we are instructed to check each buyer separately, as if they were the only purchaser. If any one buyer is surcharged, the transaction is surcharged. Sara had never owned a property before. She was exempt. But Tom owned his old flat, so he was not exempt. If he sold that flat within 3 years, could he claim exemption 2B? He would meet conditions (1), (2) and (3) – but he failed condition (4). He had not lived in his old flat since 2012, more than three years before their joint purchase. They had been misled by the website and the helpline (which, luckily, enabled them to get their surcharge back – but the website is still wrong).
First-time buyer relief
Introduced in November 2017, this relief reduces SDLT by up to £5,000, for a purchase of no more than £500,000, on a dwelling to live in as the buyer’s home.
However, it should have been called “first-time owner” relief. It is available only to those who have never owned an interest in a dwelling before, however small that interest. Did an uncle leave you a 10% interest in his £200,000 seaside flat when he died, an interest worth just £20,000 that you sold 5 years ago? Then you are not a first-time buyer.
Worse, even if you are a first time buyer, but your purchase is surcharged, you cannot claim relief. Some examples: in each example assume that a £300,000 house is being bought to live in, “H” and “W” are husband and wife, “FTB” stands for “first-time buyer” and H is a FTB.
- W once owned a £150,000 flat, but she sold it. H&W jointly buy the house.
Where there are joint buyers, each one must be a FTB. Since W is not, there is no relief
- W owns a flat worth £150,000, so H alone buys the house.
Where a couple are married (or in a civil partnership) and just one of them buys a dwelling, we have to check whether the other would be surcharged if they were buying. If they would, the purchase is surcharged. Here W would be surcharged, so H is surcharged. As a result, H cannot claim FTB relief.
- W once owned a £150,000 flat, but she sold it. H buys the house.
H can claim relief. The fact W once owned a flat does not mean H has to pay surcharge, and since W is not a joint buyer, the fact she once owned a flat is irrelevant.
- H recently married W and gained an 8-year old stepchild who inherited a £50,000 interest in her grandmother’s home last year, held in trust for her. H buys the house.
H cannot claim relief. Why? When a child under 18 acquires an interest in a dwelling, that is treated for surcharge purposes as belonging to the child’s parents and, if a parent remarries, to the new spouse as well. H is therefore treated as owning his stepdaughter’s £50,000 interest. His purchase is surcharged, so he cannot claim FTB relief.
If you require SDLT advice in relation to a particular matter we are dealing with, please speak to your usual Cripps Pemberton Greenish adviser for more information.