Sean Randall, Head of Stamp Taxes at KPMG UK, comments on the winners and losers of today’s stamp duty announcements.
Sellers at the mercy of cold feet buyers
“The new stamp duty rules set out in today’s Budget, which will take effect on 1 April 2016, are effectively a tax on chain breaks. For those buyers funding the purchase of a new home with the sale of an existing home, if their buyer pulls out but they still want to go ahead – perhaps by using a bridging loan – they will be liable for the stamp duty surcharge because they will technically own two residential properties at completion. So while the intended effect is to dissuade people buying buy-to-lets and second homes so as to help home-buyers, an unwanted side effect is potentially punishing those second, third or fourth steppers looking to move up the property ladder who, through no fault of their own, are temporarily reluctant owners of two homes.
“Although the cost of the stamp duty surcharge may be partially met by the buyer keeping the deposit paid under the failed sale contract, there will often be a significant shortfall for the buyer to fund if they still want to go through with the purchase of their new home. Conveyancing lawyers must warn their clients at an early stage of the possibility of an increased tax charge. The extra tax will be repaid, but only if the old home is sold within 36 months. For a £500,000 purchase the stamp duty charge on a chain break will be double the amount that would be payable if a break hadn’t occurred.
”Newlyweds and civil partners“
The new stamp duty rules could affect the ability for many married couples and civil partners to buy their first home together. The issue arises where one spouse already owns a property. This is because under the new rules, married couples and civil partners are treated as one buyer. In essence, ownership of an existing home by one partner will infect the purchase of the couple’s first home together. For a £500,000 purchase, the stamp duty charge in these circumstances will be double the amount that would be payable if the partner didn’t retain their existing property.“In theory, the relevant partner could just sell their old home to avoid paying the extra stamp duty on the couple’s new home. But this might be easier said than done. For example, they may suffer a high redemption penalty by selling. They may also have planned to ‘let to buy’ – turning the home they live in (and own) into a rental property to let to tenants and using the cash produced by remortgaging the property to fund the purchase of their new home. “For couples in this boat, it could well be a case of living in an unsuitable home for the first few years of married life until they can afford to sell their existing property. Or for unmarried couples perhaps the answer is don’t get married – the rule doesn’t apply to unmarried couples, unless, that is, they live in Scotland!” Buyers using ‘the bank of mum & dad’“The new stamp duty rules could catch out those buyers lucky enough to be borrowing from the ‘bank of mum and dad’. “Although the changes are designed to dissuade people buying buy-to-lets and second homes so as to help home-buyers, ironically a side effect is the impact on first time buyers. In cases where the mortgage lender insists on the buyer’s parents owning a nominal share of the property, as is typical, the parents’ ownership of their family home will ‘infect’ their child’s purchase, making it subject to increased stamp duty. For a £500,000 purchase, the stamp duty charge in these circumstances will be double the amount that would be payable if the parents weren’t obliged to own a share of their child’s property. Essentially, for first time buyers in this situation, and for the parents who have saved to help their child afford a home, the extra cost could prevent the child taking that first step onto the property ladder.”
Purchasers of mixed use properties
“The new stamp duty rules will bypass buyers of mixed-use properties in England, Wales and Northern Ireland.
“In a quirk of the new rules, the stamp duty surcharge will not apply to the purchase of a property used for residential and non-residential purposes (eg, a country house with a stud farm) or to a residential property purchased at the same time as a non-residential property. Such transactions will continue to be taxed as if they were commercial properties. The difference in tax treatment is remarkable. More than twice as much stamp duty is payable on a £2m residential property under the new rules than on a mixed-use property even with an increased top rate of stamp duty for commercial property transactions. In Scotland however, the rules are different and the price payable for a mixed-use property is split: the part payable for the residential property is taxed under the residential rates and the rest is taxed under the commercial rates.
“Perhaps we’ll see an upturn in the number of people buying a work/live property as their main residence in a bid to avoid the new charge; though whether this will be treated as a mixed-use property is unclear.”
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