Date Published 18 September 2018
Stamp Duty Land Tax (SDLT) has become increasingly more complicated following the introduction of a 3% surcharge on additional residential properties, as well as a far larger financial liability at the top end of the market (broadly speaking above £937,500). It is worthwhile exploring various possibilities available to residential property buyers to minimise SDLT and I have set out a few options below.
Multiple Dwelling Relief (MDR)
Where you are acquiring two or more dwellings in a single transaction you may be eligible for MDR. If it applies, the purchase price is divided by the number of dwellings, and SDLT charged on the average price of the dwellings, before being multiplied by the total number of dwellings. If you are buying 6 or more residential dwellings in one transaction you could save money paying the commercial rates of SDLT as an alternative. Do note that MDR is not available on commercial SDLT but it is always worth running the two calculations to determine which produces the cheaper alternative.
One scenario that may apply is where a property has an annex or subsidiary dwelling in the grounds. The applicable test is that the annex or subsidiary dwelling is suitable for use as an independent dwelling. This will enable you to use MDR without incurring any SDLT additional rates, so long as the total value of the subsidiary dwellings is less than one third of the total consideration payable.
MDR would on this basis be available for a basement level in a terraced house, where the main family living and sleeping accommodation is on the upper floors, so long as the basement has independent external access and is suitable for use independently even if it is connected internally to the upper floors and even if it is not fully kitted out and used independently at the point of purchase. Various factors will help support its independent nature, such as its access points, whether the annex has ever been separately rented out, or if it is separately rated for council tax. If a main house and ancillary dwelling are merged within 3 years of purchase, MDR is disapplied and you would be liable to pay the additional SDLT chargeable.
Care should be taken if this is a replacement of a main residence or first time purchase – if the value of the annex or ancillary accommodation is worth more than one third of the total consideration, the entire consideration will be charged to SDLT at the higher rates although MDR will still apply at the additional rates.
If you have agreed with a seller to include furniture and fittings in the price of the property, so long as there is a fair and reasonable apportionment of the consideration payable for them, this amount can be deducted from the total consideration chargeable to SDLT. It is advisable to agree this approach with the seller before exchange of contracts so that there is no dispute as to amounts being allocated to any such items. The HM Revenue and Customs website has clear guidance as to what can/cannot be included as a deduction.
Commercially rated buildings.
Some transactions which may be marketed as residential opportunities may be eligible for commercial SDLT. For example, a nursing home or hotel in a converted residential building which has planning permission for reinstatement of a residential use may still be liable to SDLT at commercial rates, so long as at the completion date the planning permission has not been implemented. If the permission is subsequently implemented post completion, this will not affect the basis on which SDLT was paid.
Consider whether you are buying a wholly residential building or whether mixed use of the building might lead to commercial SDLT rates applying. It is worth noting that, just because a part of a property is used for commercial purposes, it does not necessarily mean that it is viewed as 'mixed use' for SDLT calculations.
For example, a terraced house with a dentist's surgery on the raised ground floor and residential on all other floors was held to be fully residential and therefore commercial rates of SDLT were not applicable. In contrast, a country house set up as a bed and breakfast business, despite visually appearing to be a residential house, was viewed to be mixed use and therefore subject to commercial rates of SDLT. HM Revenue and Customs has said that each case will be reviewed on its own merits.
Annual Tax on Enveloped Dwellings (ATED)
Care should particularly be taken in relation to ATED. This arises where residential properties are held through companies and where no exemptions are applicable and an annual charge is therefore payable. The most common exemption to ATED is renting out a property on an arm's length basis to a third party, or for property development purposes.
If you buy a property in a company, not intending to rent it out on arm's length terms, but to rent it to connected parties (a very wide definition) or to occupy it yourself, you will be liable to SDLT of 15% on the entire purchase price (for properties costing more than £500,000), as well as ATED, which can vary from £3,600 per annum (for properties worth between £500,000 and £1m) up to £226,000 per annum for properties worth more than £20m, so advice should be taken. The benefit of anonymity often cited as a reason for buying in a company, has been removed, with a current obligation to disclose the ultimate beneficial owner of UK companies, and a bill for the same to apply to foreign companies.
Analysis of each purchase on its own merits should be carried out initially by the instructed lawyer, but potentially with tax advice as well, to ensure that every option is considered to minimise SDLT and to avoid any potential recourse should the calculation be incorrect or founded on a misunderstanding of this complex area of law.
Source: Lonres Blog 31st August 2018 - author Charles Mieville