Stamp duty land tax (SDLT) is a self-assessed transaction tax payable by the purchaser of an interest in land. Since its introduction in 2003, SDLT has been the focus of numerous finance-generating changes in a way that old-style stamp duty never was.
Current provisions
From April 2016, two different SDLT rates have applied to residential property acquisitions – an ordinary rate and a higher rate. The higher rate applies to acquisitions of additional residential properties, such as buy-to-lets or second homes. An additional 3% rate applies if a buyer already owns, or has an interest in, another residential property anywhere in the world. Both rates apply on a “slice” system, so that only the portion of the purchase price that falls within a specific band is taxed at that rate.
There is also a 15% rate for acquisitions by “non-natural persons”, such as companies, on residential property valued at more than £500,000. Conversely, since November 2017, subject to conditions, first-time buyers have been able to obtain relief from SDLT provided that the price of the property does not exceed £500,000 – the first £300,000 being entirely tax free. A plethora of reliefs and exemptions from SDLT liability exist under the current regime, so careful consideration of the SDLT rules is needed for any transaction. Without a doubt, the current SDLT regime would benefit from simplification.
Proposed changes
Perhaps most controversially, in February the Treasury and HMRC launched a consultation on a proposed additional 1% increase in SDLT liability for non-UK buyers of residential property in England and Northern Ireland (Scotland and Wales have independent transaction tax regimes). The rationale behind the new surcharge is to curb house price inflation, increase home ownership and reduce the number of rough sleepers in the UK by half in three years, by using the additional tax collected for schemes to relieve homelessness.
The surcharge will apply to all “non-residents”, including non-UK individuals, companies, trusts and partnerships. There are detailed rules to test residency for each type of entity. For example, the government proposes to treat individuals as non-UK residents if they spend fewer than 183 days in the UK in the 12 months ending with the date of the transaction. For joint purchases, all the buyers must be UK residents, otherwise the additional 1% rate would apply to the whole purchase price for all the buyers.
With corporate buyers, a UK resident company will still need to pay the surcharge if, at the date of the acquisition, it is directly or indirectly controlled by one or more non-UK residents. In the case of partnerships, each individual partner’s liability for the surcharge will be determined by their own residency, rather than the status of the partnership itself. Trusts would, broadly speaking, need to be residency tested on the basis of their classification as either “bare trusts” or “settlements”, so the terms of any trust would need to be checked carefully. Clearly, obtaining expert tax advice will be crucial going forward.
Certain persons would be exempt from the surcharge, including crown employees such as military service personnel. Refunds may be applicable if certain conditions are met; for example, when an individual spends 183 days or more in the UK in the 12 months following completion of the transaction. Non-residential or mixed-use property will not fall within the ambit of the surcharge. The purchase of such property would be taxed at a lower non-residential rate of up to only 5%, perhaps paving the way for a greater number of overseas investors in commercial property.
It has not yet been confirmed that the surcharge will be introduced in line with the proposals. Various factors will influence how the surcharge may be implemented, including the Brexit negotiations and Boris Johnson’s interest in the wholesale reform of the SDLT regime, even possibly shifting some of the tax burden from buyers to sellers.
Lack of consensus
Current opinions on the proposed surcharge vary. Raising taxes from foreign buyers may seem justifiable, but if one of the government’s main aims is increasing affordable housing supply, then a comprehensive review of the planning system should also be considered alongside the strict requirements to provide affordable housing to ease cash-flow issues for developers. There is no consensus in parliament that foreign ownership is a key factor in affordability. The London property market has slowed down since the introduction of the 3% surcharge on additional residential properties, and the proposed foreign buyer surcharge will not stem the decline. The surcharge might reduce overall foreign investment in the UK, which in the long term might be undesirable, particularly after Brexit. Alternatively, the surcharge could be viewed as part of the aim to make the UK market independent, including the property sector.
Interestingly, the prime minister had also suggested removing SDLT liability on properties worth less than £500,000, meaning that average-priced properties in the UK could become immune from SDLT – including the average London property, priced at £484,584. Boris Johnson also boldly proposed reversing George Osborne’s SDLT increase on homes valued at more than £1.5m by cutting the 12% SDLT rate to 7%.
Final word
Innovative ideas abound, such as SDLT relief on downsizers’ purchases to free up larger family homes; switching liability to the seller to promote “intergenerational fairness”; and the various ideas of the prime minister for threshold hikes and rate adjustments.
One thing is clear – any changes need to be made swiftly so as to avert the risk of further damage to the market caused by buyers and sellers sitting on their hands waiting for an advantageous SDLT change to boost the property market, where everyone, other than foreign buyers, might hope to be a winner.
Anjana Dahya is associate in the residential property team, and Janet Armstrong-Fox is a partner in the real estate team, Collyer Bristow LLP
