James Bailey provides an overview of the Chancellor’s 2014 autumn statement announcement, which removed an anomaly in the way stamp duty land tax (SDLT) is charged on residential property.
Until 4 December 2014, the rate of tax that applied to the whole price of a property was a percentage based on the amount payable. This led to sudden jumps in the cost for a buyer.
For example, the rate of SDLT on a purchase price up to £250,000 was 1%, and on a price between £250,001 and £500,000 it was 3%. Buy a house for £250,000 and you would pay £2,500 SDLT; pay £250,001, and you would pay £7,500. The next big jump came at £500,000 – a price of £500,000 meant SDLT of £15,000; pay one pound more and the rate became 4% and the SDLT payable was £20,000.
This led to artificial gaps in the market and also to some very expensive fridges and curtains, as buyers struggled to get the purchase price below the nearest threshold.
From 4 December 2014, this has changed for residential property, and the new rates are:
£0 to £125,000 0%
£125,001 to £250,000 2%
£250,001 to £925,000 5%
£925,001 to £1.5m 10%
Over £1.5m 12%
The key point is that these rates are progressive, so if you buy a house for £350,000, you will pay nothing on the first £125,000, 2% (£2,500) on the next £125,000, and 5% (£5,000) on the remaining £100,000 – a total of £7,500. Under the old rules, you would have paid 3% (£9,000) on the whole of the price.
The new rates work out cheaper than the old on purchases up to around £938,000. It is essential to realise that the new rates only apply to residential property. Commercial and mixed-use properties retain the old rules, and the ‘slab’ system, so that the whole of the price of a commercial property is taxed at the following rates:
£0 to £150,000 0%
£150,000 to £250,000 1%
£250,000 to £500,000 3%
Over £500,000 4%
There are a couple of points to watch out for:
Trap:
‘Linked transactions’
Transactions are ‘linked’ if they are between the same buyer and seller or persons ‘connected’ with them. If you buy a house for £249,000 and your spouse buys the garden for £100,000 from the same seller, the rate of SDLT is calculated on the whole amount paid of £349,000. You cannot argue that your spouse’s purchase was below the threshold of £125,000, because it is ‘linked’ to your purchase.
The trap comes if there is a purchase of residential property and it is ‘linked’ to a purchase of commercial property. The legislation deems the whole transaction to be a purchase of non-residential property, and so the old rules will apply to the entire purchase price. This may be good or bad depending on the total amount paid, but it is important to be aware of the existence of this rule.
Practical Tip:
If a transaction, or a series of ‘linked’ transactions, includes more than one ‘dwelling’, then there is a relief for ‘multiple dwellings’.
Broadly speaking, you work out the average price of all the dwellings concerned, and base the rate of SDLT to be charged on that. For example, if two dwellings are purchased for £550,000, the SDLT is based on the average price of £275,000, giving SDLT payable of £3,750 on each, a total of £7,500. This relief cannot reduce the total SDLT payable to less than 1% of the total price, but as that would be £5,500, the relief applies and the SDLT due is £7,500.
Multiple dwellings relief means that any SDLT on non-residential property is calculated separately, thus overriding the rule deeming linked transactions that include non-residential property to be all non-residential.
