The draft LTT additional rates legislation was published on 26 January. It makes some key changes, aimed largely at countering anti-avoidance.
On 26 January 2017, the National Assembly for Wales published the draft legislation for additional rates transactions under the devolved Land Transaction Tax (LTT) regime. Much like the recent ‘surcharge’ legislation introduced for SDLT on 1 April 2016, the provisions seek to impose an additional rate of LTT on the acquisition of second homes and buy-to-let properties. Broadly, the draft legislation provides that where you are acquiring a second home or a buy-to-let property, and where you already own either a main residence or another residential property, then the subsequent residential property purchase will be subject to additional rates of LTT, subject to certain conditions and exemptions. Though inspired by the SDLT legislation, the LTT legislation introduces three key changes to the additional rates regime, mainly focused at anti-avoidance.
Much like SDLT, LTT does not seek to impose the higher rates on the acquisition of residential property that is encumbered by a long lease (here meaning subject to a lease for an unexpired term of more than 21 years). However, the LTT legislation has included a connected person clause, whereby the long lease will be disregarded if it has been granted to a person connected to the purchaser. This is presumably to prevent sham leases being granted immediately before the property is acquired to connected persons, the reversionary interest being acquired (without the surcharge applying) and the lease being surrendered shortly thereafter (please note that in practice such an arrangement would likely be caught by SDLT anti-avoidance provisions). The draft LTT provisions prevent such planning from being effective; however, they will also catch genuine transactions whereby a person buys a reversionary interest in a property over which a family member has a long leasehold.
Further, both the SDLT additional rates legislation and the draft LTT legislation provide for an exemption where the additional property is acquired as a replacement to the purchaser’s main dwelling, providing that the previous dwelling is sold within a period of three years before or after the date the second property was acquired. The LTT legislation however addresses ‘intermediate transactions’ which may take place within that three year period. For instance, under the current SDLT rules, if you hold just one property, your main residence, disposing of that residence would trigger the start of the three year window. Subsequent to that disposal, the acquisition of a buy-to-let property should not be subject to the additional rates, as no other property is held at the date of acquisition. Thereafter, and before the expiry of the three year period, you may then acquire your replacement main residence. This acquisition should also not be subject to the additional rates, as this falls within the replacement of main residence exemption. The LTT draft legislation seeks to make such intermediate transactions chargeable to the additional rates of tax.
Finally, while the first two points are aimed at anti-avoidance, the last measure would appear to be a concession to the taxpayer. Currently, under the SDLT legislation, in the example of a boyfriend wanting to buy out his ex-girlfriend’s share of the flat they purchased together, HMRC’s view is that the acquisition of that share would be subject to the additional rates, as he is making an acquisition of property, while already holding an interest in property, and has not made any qualifying disposals. This seems unfair and disproportionate to the acquisition being made. After the acquisition, he will only hold one property. The LTT legislation seeks to fix this by exempting acquisitions from the additional rates where the purchaser already holds an interest in that dwelling, and the surcharge would not otherwise apply, thus removing the above example from the scope of the charge.
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