Peter Rayney looks at the higher rates of stamp duty land tax for additional dwellings and the conditions for the 3% ‘surcharge’ to apply.
Buy-to-let landlords have received more than their fair share of fiscal bashing from the Chancellor. Individual landlords will see restrictions in their loan interest tax relief from 6 April 2017. Before then – since 1 April 2016 - they have also been hit by the 3% stamp duty land tax (SDLT) ‘surcharge’.
This ‘surcharge’ broadly applies to individuals purchasing ‘dwellings’ where they already own at least one dwelling, unless they are ‘replacing’ their main residence. The 3% SDLT surcharge will also apply to all dwellings purchased by companies.
Why are landlords being singled out for harsher tax bills? It would appear that they are being blamed for pushing up property prices and locking-out first-time buyers from the property market. The 3% surcharge is intended to act as a disincentive to the purchase of buy-to-let properties, thus freeing up property stock for home-owner occupiers.
SDLT on residential property and ‘dwellings’
SDLT on residential property is calculated on a progressive sliding scale, with the SDLT being determined by reference to the SDLT rate for each relevant band – or ‘slice’ – of chargeable consideration (Scotland has a different system for taxing the purchase of properties – known as the Land and buildings transaction tax (‘LBTT’) – which mainly adopts the SDLT rules).
Since 1 April 2016, the current SDLT rates on residential properties are as follows:
Chargeable consideration Normal Rate With 3% SDLT surcharge
Up to £40,000 0% 0%
£40,001 to £125,000 0% 3%
£125,001 to £250,000 2% 5%
£250,001 to £925,000 5% 8%
£925,001 to £1,500,000 10% 13%
Excess over £1,500,000 12% 15%
The status of a residential house or flat is normally clear-cut. In HMRC’s view, the status of the property is based on its use at effective date of the transaction. This overrides any past or intended future use.
The 3% surcharge only applies to (major interests in) dwellings, which are defined in FA 2003, Sch 4ZA, para 17. The main part of the definition is as follows:
17(2) A building or part of a building counts as a dwelling if:
(a) it is used or suitable for use as a single dwelling, or
(b) it is in the process of being constructed or adapted for such use.
17(3) Land that is, or is to be, occupied or enjoyed with a dwelling as a garden or grounds (including any building or structure on that land) is taken to be part of that dwelling.
17(4) Land that subsists, or is to subsist, for the benefit of a dwelling is taken to be part of that dwelling.
The legislation refers to transactions that are subject to the 3% surcharge as ‘higher rate transactions’.
Purchases by individuals - Conditions for ‘higher rate transactions’
The purchaser will be subject to the 3% surcharge where they are acquiring a major interest in a dwelling and (broadly):
- the chargeable consideration is £40,000 or more (Condition A);
- it is not a reversionary interest on a lease that has more than 21 years to run (Condition B);
- at the end of the day of purchase, the purchaser already has a ‘major interest’ in one or more dwellings (Condition C); and
- the acquired dwelling is not a replacement of the purchaser’s main residence (Condition D).
For the purposes of Condition C, a major interest is one with a market value of more than £40,000, which is not reversionary on a lease with more than 21 years left to run.
Condition D ensures that the 3% surcharge does not bite if the purchased ‘new’ dwelling is (or is intended to be) a main residence, which replaces an existing main residence. However, this ‘exemption’ only applies if the purchaser (or their spouse/civil partner):
- has sold their previous main residence in the three years before the new main residence is acquired; or
- subsequently sells their existing main residence in the three years following the purchase of the ‘new’ (replacement) main residence.
The second part of this article will follow in the September 2016 issue.
This article is based on the current Finance (No 2) Bill 2016, which may be subject to change before it receives Royal Assent.
