As announced at the Spending Review and Autumn Statement 2015, a stamp duty land tax (SDLT) surcharge will apply to purchases of additional residential properties such as buy-to-let properties and second homes.
The surcharge – an additional three percentage points on each of the existing residential rates of SDLT – is part of five measures aimed at supporting home ownership.
The new rules are subject to consultation. The consultation document can be found here. The consultation will close on 1 February 2016. Certain organisations, including us, will attend meetings with HMRC to discuss the consultation. Those meetings are to take place in a two-week period prior to 1 February 2016.
This paper summarises the proposal. If you have any questions on it or if you have any comments that you would like considered as part of KPMG’s response to the consultation, please contact us. Our details can be found at the end of this paper.
The surcharge will apply to purchases of ‘additional residential properties’ in England, Wales and Northern Ireland; equivalent measures will apply to land and buildings transaction tax (LBTT) in Scotland and a separate consultation exercise is being run for that tax.
A residential property is an ‘additional’ residential property where, at the end of the day of its purchase, the purchaser owns two or more residential properties and he has not replaced his previous main residence.
Where the surcharge applies, the purchaser intends to use the purchased property as his new main residence and he sells his previous main residence within 18 months, the surcharge will be refunded.
The surcharge is shown in the table below:
|Purchase Price||Existing residential SDLT rates||Proposed residential SDLT rates|
|So much as does not exceed £125,000||0%||3%1|
|So much as exceeds £125,000 but does not exceed £250,000||2%||5%|
|So much as exceeds £250,000 but does not exceed £925,000||5%||8%|
|So much as exceeds £925,000 but does not exceed £1.5 million||10%||13%|
The consultation document states (at 2.3) that the surcharge will only apply to purchases of additional residential properties which complete on or after 1 April 2016.
HMRC has stated elsewhere that the surcharge will not apply to land transactions that complete after 31 March 2016 where:
Married couples and civil partners
The Government proposes to treat married couples and civil partners as a single purchaser unless they are separated under a court order or by a formal Deed of Separation. So they may own one main residence between them at any one time for the purposes of the surcharge. Residential property owned by either partner will be relevant when determining if an additional residential property is being purchased or not.
Where a residential property is purchased by two or more persons the proposal is for the surcharge to apply in full where, at the end of the day of the transaction, any of the purchasers has two or more residential properties and is not replacing their main residence. The liability of the purchasers to pay the SDLT is joint and several. The Government recognises that this may be unfair and implies that it might consider restricting the surcharge to the proportion of the property purchased by the person for whom the property is an additional residential property.
Purchasing a residential property for children to live in
The Government proposes that the surcharge will apply if the purchased property is owned to any extent by the child’s parents (assuming they already own a residential property), but will not apply if it is owned by the child even though the purchase was funded by his parents.
Main residence test
When determining whether a residential property is a main residence, the Government proposes not to use an election-based system. Instead, the matter is to be judged by reference to facts that include:
Delay between selling a main residence and purchasing a new main residence
Provision is proposed to be made for circumstances where an individual replaces his main residence but not immediately, e.g. where:
The proposal is that the surcharge is payable in the first example but will be refunded if he sells his previous main residence within 18 months. It is not payable in the second example if he buys his new main residence within 18 months of the sale of his previous main residence.
Where the previous main residence is sold before the filing date of the SDLT return for the purchase of the new main residence, the surcharge may not need to be paid. The filing date is generally 30 days after completion. But the Government will consult separately on plans to reduce that period to 14 days. For mortgage-funded purchases, the pressure by the lender to register ownership of the property will mean that the option of delaying the submission of the SDLT return will not be open.
Overseas purchasers and foreign properties
Only the purchase of additional residential properties in England, Wales and Northern Ireland will be subject to the SDLT surcharge. However, the Scottish Government has announced that an equivalent surcharge for LBTT will apply to the purchase of additional residential properties in Scotland: see here.
When determining whether, at the end of the day of the purchase of a residential property, the purchaser owns two or more residential properties, a property owned anywhere in the world will count as an additional property. Consequently, overseas purchasers will need to apply the ‘main residence test’ to their overseas property; and, if applicable, they will need to replace their overseas main residence with a UK main residence to avoid the surcharge.
Purchase of mixed-use property
The surcharge will only apply to residential property transactions. The meaning of residential property is not proposed to change. So the surcharge will not apply to the purchase of any of the following:
Purchase of multiple residential properties
The purchase of more than one residential property may be eligible for a partial SDLT relief, multiple dwellings relief (MDR). Under MDR, the residential rates of SDLT are applied to the average price of each property multiplied by the number of properties purchased subject to a minimum amount of tax payable.
Where six or more properties are purchased, the purchaser can choose whether to apply the non-residential rates of SDLT or the residential rates of SDLT with MDR applied. This system is proposed to be retained except that if the surcharge applies and MDR is claimed, the SDLT is calculated under MDR using the higher rates.
The Government proposes to exclude investment in residential property that increases the overall housing supply. At the Autumn Statement, it indicated that only corporates and funds would benefit from the exemption and only where they already own 15 or more residential properties. It is now considering extending the exemption to individuals that already own 15 or more residential properties.
To prevent avoidance, the Government proposes to apply the surcharge to the first purchase of a residential property by a company or collective investment scheme.
Trusts and settlements
Land transactions entered into by nominees or bare trustees are treated as if they were entered into by the person for whom the nominee or bare trustee acts.
Beneficiaries under certain types of settlement (such as life tenants of interest in possession trusts) will, under the proposal, be treated as owning a residential property if the settlement owns a residential property. Beneficiaries under discretionary trusts or remaindermen of interest in possession trusts will not unless, perhaps, they are entitled to occupy the property. Other than this, the consultation document does not set out how the rules will distinguish between different types of beneficial interest.
The approach proposed by the Government prioritises simplicity. As the Government accepts, this may be at the cost of unfairness for particular situations. One hopes that the short consultation period (only five weeks) is enough to establish the extent of that unfairness and design a system that makes an acceptable compromise.
The proposal to retain the mixed-use rule is surprising. The existence of non-residential use in a property or the purchase of a non-residential property with the purchase of a residential property pulls the transaction into the non-residential rates of SDLT. There is no proposal to change the current rules to apportion the purchase price to the residential and non-residential elements of a transaction such that different rates apply to each element. There is a significant difference in rates between residential rates with the surcharge and non-residential rates. The maximum difference in rates is approximately 11%. For example, suppose an individual purchases a mixed-use property for £2m as an investment. The value of the residential property is £1.7m; though this is not relevant to the amount of SDLT payable. He would pay £80,000 of SDLT. Next, suppose the individual purchases an additional property that is exclusively residential as an investment for £1.7m. He would pay £165,000 – more than twice the amount payable for a mixed-use property.
If the transitional provisions will operate as described by HMRC prior to the publication of the consultation document, transactions that complete after 31 March 2016 will not attract the surcharge if the sale contract is substantially performed before that date. Substantial performance is triggered by taking possession of substantially the whole of the subject-matter of the contract, paying a substantial amount of the purchase price or, where the interest purchased is a new lease, making the first payment of rent. No anti-forestalling provisions have been announced. So where completion is set to occur on or after 1 April 2016 and the surcharge would otherwise apply, substantially performing the contract before 1 April 2016 may mean that only the standard residential rates apply; albeit it will trigger the point at which the tax must be paid in circumstances where, but for substantial performance, the tax would be payable on completion.
Contrary to speculation, there is no proposal to introduce an equivalent of principle private residence relief for capital gains tax. It will not be open for individuals to elect which property is a main residence. The tax is self-assessed. Consequently, the burden of deciding whether the surcharge applies because the property purchased is replacing a main residence will be for the purchaser and enforced by penalties for careless or deliberate errors. It is likely that this will be an area for compliance checks.
The proposal for the surcharge to apply whenever a company or collective investment scheme buys a residential property appears to be harsh. A flat rate (or ‘super rate’) of 15% SDLT already applies to the purchase of residential properties worth £500,000 or more by corporate vehicles. But this is subject to various exclusions for business use (eg, developing, trading or investment). Those exclusions will be widened in this year’s Finance Act and generally reduce the scope of the rate to individuals occupying residential properties through companies for reasons that include SDLT avoidance. Subject to the proposed exclusion for large-scale investors, the surcharge will apply to the purchase of any residential property by a company or collective investment scheme regardless of the purpose to which the property is applied and whether the company is part of a group that makes significant investment in residential properties. This does not penalise enveloping per se – the 15% super rate, annual tax on enveloped dwellings (ATED) and ATED-related CGT already do that (though see 5.8 below) – rather it is to prevent individuals using corporate vehicles to avoid the surcharge. Assurances were made at the Autumn Statement not to charge developers the higher rates of SDLT. So the absence of a developer-based exemption is controversial, but appears to be intentional (see example 37). It is unclear why a person that purchases a residential property for development or redevelopment and resale in the course of a property-development trade should be penalised. Arguably, this type of activity should be encouraged, as it increases housing supply.
Particular thought needs to be given to setting the exclusion for large-scale investors. On the face of it, the requirement for the purchaser to own a pre-existing portfolio of 15 or more residential properties is unsatisfactory. It creates a barrier to entry (the purchase of the first 15 properties will be subject to the surcharge), so gives existing investors a commercial advantage over new entrants. It also does not distinguish between an investment that increases housing supply and one that does not. For instance, the purchase of a single residential property by an individual does not increase housing supply. The fact that the individual already owns 15 residential properties does not make any difference. The requirement for a pre-existing portfolio of 15 or more residential properties is driven by the Government’s perception that purchases by small investors while significant cumulatively do not provide the same level of certainty or security to developers as purchases by large-scale investors. One might say that MDR and the six-or-more rule already relieves the type of investment activity that increases housing supply.
Investors in student accommodation should be wary. The normal rate of SDLT on qualifying student accommodation (eg, cluster-flats and studios) is generally 1% – the minimal rate under MDR. If the proposed investor exemption does not apply (eg, the purchase is made by an SPV and no group exemption exists), the new normal rate of SDLT will generally be 3% (or 4% for higher-value accommodation, eg, in central London). Presumably, this may affect investment committee decisions. That this type of asset class may be affected is illogical. It is, by its nature, suited for rental not ownership; hence, penalising purchases of it is not within the policy of the surcharge.
The introduction of the current residential rates (with a maximum marginal rate of almost 12%) last year eroded the penal effect of the 15% super rate for enveloping. The surcharge will erode it further. The maximum marginal rate will be substantially the same as the super rate. This may encourage enveloping, especially for buy-to-let properties.
The surcharge will add to what is already a complex scheme of rules. In order to calculate the correct amount of SDLT to pay for a residential property transaction one needs to consider things that include:
The consultation document is vague in describing what interests in residential property owned by a purchaser will count for the purposes of the surcharge. It would be consistent with the policy objective for short leases (under 21 years) to be disregarded as residential properties for these purposes. We note that owning such leases did not disqualify a purchaser from SDLT first-time buyer relief. It would also be consistent with the policy objective for the purchase of the reversionary interest in a property to be disregarded where the purchaser already holds a long lease over the property (enfranchisement).
A further issue to consider, in an era of increasing workforce mobility, should be the impact of the surcharge on those moving for reasons of employment. Confirmation by the Government that employer-provided accommodation will not count for the purposes of determining whether the surcharge applies is welcome, but will not generally be relevant when considering, eg, relocation. An individual who is required to relocate within the UK will need to pay the surcharge if their current main residence cannot be sold prior to relocation. The additional amount may be repaid once that property is sold, but it would arguably be better to allow longer for the sale of the existing property and avoid the need for the additional burden of a payment.
Those on assignment to the UK and who retain a residential property in their home country will need to take that property into account when calculating the applicable SDLT rate on any UK purchase. The surcharge may apply even where the UK property is their main residence for the duration of the assignment: this does not seem wholly consistent with the overall policy objective, and is potentially in conflict with the Government’s stated aim of “remain[ing] open to the world’s best talent”. This issue should be considered further as part of the consultation process.
The proposal to deem certain types of beneficiaries of settlements as owning residential properties for the purposes of determining when the surcharge applies rubs up against existing rules that treat the trustees of settlements as making the acquisition.
The consultation document suggests that the surcharge will apply to the first purchase of a residential property where a trustee of a settlement purchases the property. The reasoning for this is unclear.
Presumably, where a trustee purchases a main residence in his personal capacity it will count as an additional residential property where he already owns a residential property in his capacity as trustee. If so, this would arguably be unfair, especially where the surcharge has been paid on the original property purchased by the trustee.
A separate (informal and unstructured) consultation exercise is being run in parallel on the meaning of residential property for SDLT purposes.
For more information please contact any member of KPMG LLP’s stamp taxes group:
Sean Randall: +44 (0) 20 7694 4318 firstname.lastname@example.org
Simon Yeo: +44 (0) 20 7311 6581 email@example.com
Neil Whitworth: +44 (0) 161 246 4276 firstname.lastname@example.org
Fiona Cole: +44 (0) 121 232 3073 email@example.com
Jo Joyce: +44 (0) 113 231 3365 firstname.lastname@example.org
Ginny Offord: +44 (0) 20 7311 4075 email@example.com
Preema Patel: +44 (0) 20 7311 3583 firstname.lastname@example.org