Stamp Duty Land Tax hike - more pain for buy to let investors

By Clare Munro, Tax Partner

While most of us were still dealing with the Christmas leftovers, HMRC issued a consultative document to follow up the Autumn Statement announcement of higher SDLT rates on some residential property purchases. We therefore have a better idea now of how the 3% hike will work.

As expected, an additional 3% SDLT will be charged on all second or subsequent residential property purchases, including those currently below the SDLT threshold. While the press has presented the increase as an attack on buy to let, in fact it has wider implications for anyone buying a second home or holiday let too. With property prices at all time highs, the figures involved are substantial too - an additional £60k on a £2m home - see point 1 below - bringing the total SDLT cost to a whopping £214k.

The proposal is expected to work on the basis that everyone is entitled to purchase a main residence paying 'normal' SDLT rates. However, if at the end of a day on which you acquire a residential property, you own more than one such property, then the additional rate will be charged.

Key points indicating how this might operate are:

  1. SDLT is now a banded 'progressive' tax rather than applying at a single marginal rate to the entire purchase consideration. The additional 3% is at each stamp duty band so someone buying a residential buy to let for £2m will pay additional duty as follows:

  2. Spouses and civil partners will be treated as a single unit with an entitlement to one main residence. By contrast it seems an unmarried couple could each acquire a property at the lower rates.
  3. A main residence can be replaced, even if the owner holds other properties. Issues are likely to arise where a main residence is replaced but the purchase and sale do not happen together. In particular someone who purchases a new main residence on bridging finance while trying to sell their old home will also need to find the additional SDLT, albeit they can claim a refund if the old property is sold within 18 months of the new purchase.
  4. The question of what is one's main residence becomes crucial and, unlike for capital gains tax, there will be no way to make an election of one property to be treated as a main residence. Instead the matter will be decided on the facts, taking into account issues like where the owner spends most time, where the children attend school etc. The consultation states that in most cases this will be easy to determine. 
  5. Companies and trusts owning residential property will be affected too; the only exception being where a trust holds a main residence for a beneficiary with a life interest. The consultation is considering an exemption for large scale purchasers of 15 or more properties on the basis that, on this scale, they might make a positive contribution to the housing supply. 
  6. Commercial property escapes this additional charge.

This SDLT increase is presented in the consultation as a means to ensure fair access to residential property ownership, but was always going to be tricky to design in such a way as to achieve that.  It's perhaps a measure of just how tricky that a consultation was considered necessary and, where in the past SDLT changes have usually taken effect immediately, this one was deferred until 6 April 2016. 

The jury's out on whether a duty increase will work to prevent first time home-owners being crowded out of the residential property market.  Ultimately, as every economics student knows, raising the price should reduce demand, and in fact the property market needs to react to these changes in order to meet the policy objective of supporting first time buyers and locals in holiday areas. With the current levels of global uncertainty, however, it's really not at all certain that the cost will be sufficiently off-putting to curb demand in the long term.  

Even if this reduces demand at the upper echelons of the market, that may not help the first timer on average earnings, so the SDLT pill may not be the answer to the UK's home ownership problem.  What is clear is that, coming on top of last summer's announcements on restricted interest deductions for property investors, the ATED tax on corporate owners of residential property and increased regulation, it is another sign of an increasingly hostile climate for residential property investors.  

If you would like to discuss these issues further, please email me.

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