The line of duty

In his autumn statement on 25 November 2015, George Osborne announced that, with effect from 1 April 2016, a higher rate of stamp duty land tax (SDLT) would be applied to the purchases of additional residential properties (such as second homes and buy-to-let properties). There was a very brief consultation on the ‘details for the policy design’ at the beginning of the year, and draft legislation was then published initially in the budget resolutions on 16 March 2016, and then in the Finance Bill on 24 March 2016. The changes were introduced with effect from 1 April 2016.

The basics

In simple terms, the higher rate will apply if, at the end of the day on which a purchaser purchases a major interest in property, they own a major interest in another dwelling. They will then have to consider whether exemptions (such as the main residence exemption) might apply.

The higher rate is an additional 3 per cent to the rates set out in table A of section 55 of the Finance Act 2003 (FA 2003). Any interest in a dwelling worth less than £40k is disregarded (whether of the existing property or additional property). Thereafter, the higher rate will apply, so that dwellings costing up to £125k will be taxed at 3 per cent, those costing £125k-£250k at 5 per cent, those costing £250k-£925k at 8 per cent, those costing £925k-£1.5m at 13 per cent, and those costing over £1.5m at 15 per cent.

Major interest

A major interest is defined in section 117 of the FA 2003 as a freehold or a leasehold interest. This is modified for the purposes of the higher rate, so that it only applies to freeholds and leaseholds if the lease was originally granted for a period of seven years or more. So a lease that was originally granted for 100 years which has only four years left to run is a major interest for these purposes, but a lease with the same remaining term but originally granted for six years does not.

Dwelling

The definition of dwelling is very similar to the definition used for the 15 per cent rate of SDLT and for multiple dwellings relief. It is a building or part of a building which is used or suitable for use as a single dwelling, or is in the process of being constructed or adapted for such use. It also includes gardens and grounds which are to be occupied or enjoyed with the dwelling, and land that subsists for the benefit of the dwelling. At present, there is a certain amount of confusion about the extent of a dwelling where, for example, there is business use either within the dwelling itself or in gardens or grounds, and HM Revenue & Customs (HMRC) is currently consulting on this. The higher rate of SDLT makes it all the more important that detailed guidance around what comprises a dwelling is forthcoming as soon as possible.

Dwellings include holiday homes (even if they cannot be used year-round) and furnished holiday lettings, but not caravans, house boats and mobile homes.

Mixed-use property is outside the higher rate tax, and will be taxed as non-residential (and so subject to the new regime that applies to non-residential property).

Off-plan purchases can also fall within the definition of dwelling.

Non-UK land

The interest can be in land outside England and Wales, so a non-UK dwelling owned by the purchaser is treated as ownership of an existing dwelling.

Where an individual purchases a single dwelling

The higher rates will apply if, at the end of the day of purchase, the following four conditions are met.

a) The chargeable consideration is £40k or more.

b) The dwelling is not subject to a lease which has more than 21 years to run at the date of purchase.

c) The purchaser owns an interest in another dwelling which has a market value of £40k or more and is not subject to a lease which has more than 21 years to run at the date of purchase of the new dwelling.

d) The dwelling being purchased is not replacing the purchaser’s only or main residence.

The higher rate will apply if, at the end of the day on which a purchaser purchases a major interest in property, they own a major interest in another dwelling. They will then have to consider whether exemptions might apply

Main residence

Under condition d above, the purchased dwelling must not be a replacement of the purchaser’s only or main residence. There are two parts to this test. The disposal test is that there must be a disposal of the purchaser’s (or their spouse or civil partner’s) previous main residence. The acquisition test is that the dwelling acquired must be intended to be occupied as the only or main residence of the purchaser, all joint purchasers, both spouses or both civil partners.

There is no definition of main residence. The guidance sets out a number of points that HMRC considers might be useful in establishing which residence is an individual’s main residence (although the list is not exhaustive). HMRC identifies Frost v Feltham [55TC10] as a useful case which sets out a summary of the criteria to be applied when considering how you would decide which, of two residences, is an individual’s main residence.

There are two situations in which the purchase of a dwelling can be a replacement of a main residence. The first, clearly, is where the disposal of a main residence occurs before or on the same day as the purchase of the ‘second’ residence. The second is where the purchase of the second residence happens first, and then the disposal happens later.

In the first of these situations, the main residence has to be sold within 36 months of the purchase of the second residence. In the second, the main residence must be sold within 36 months of the acquisition of the second residence. These tests apply not only to the individual purchasing, but also to their spouse or cohabitee. The first of the 36-month tests will not be applied for purchases on or before 26 November 2018. This is a transitional provision which is intended not to disadvantage those whose last disposal of a main residence was before the announcement of the higher rates on 25 November 2015. So, someone who bought a second property on or before 26 November 2018, and sold a main residence in 2010 which the newly-acquired property replaces, will still benefit from relief from the higher rate.

Joint purchasers

Where a transaction is entered into by joint purchasers, the additional rate will apply to the transaction if the conditions are met for any of the purchasers considered individually. This applies whether the purchase is as tenants in common or joint tenants, and it does not matter how small the interest of a particular purchaser is. So, if A and B buy a property which is an additional property for B, but B only has a 0.1 per cent interest in the property, it is still subject to the additional rate. Where there is a single purchaser, but the purchaser is married or in a civil partnership, the transaction will attract the higher rate if the four conditions described above are met by either spouse or civil partner. This does not apply if a married couple is either legally separated or separated in circumstances where the separation is likely to be permanent. This means that if one member of the married couple has disposed of a main residence, but the other has not, the higher rate will still apply.

Existing ownership

It will often be self-evident whether a purchaser fulfils condition c above: that is, whether they legally and beneficially (and it is beneficial ownership that is important) own an interest in another dwelling. But there are provisions which deem an individual to own an interest in an existing dwelling. Clearly, this will be the case if the dwelling is held as a nominee for the individual. But it also applies where the beneficiary of a trust would be absolutely entitled, but for being underage or disabled in a way that prevents them from being legally capable of owning the property. Similarly, where a minor child would be treated as owning an interest in land because they are the absolute beneficiary of a trust, the parents of that child are also treated as owners of the interest. Where a dwelling is owned by the beneficiary of a trust who has the right to occupy for life or the right to income (that is, they are a life tenant), the life tenant is treated as owning the interest. This does not apply to discretionary beneficiaries.

Where an individual purchases two or more dwellings

There are separate rules which apply when an individual purchaser purchases two or more dwellings in the same transaction.

In these circumstances, it is an all-or-nothing test. A transaction involving more than one dwelling will either be liable to the higher rate of tax or it won’t. The rules do not allow for a single transaction to be a combination of higher and normal residential rates.

There are four conditions which are relevant to the purchase of two or more dwellings in a single transaction. They are modified versions of conditions a-d noted above.

a) The chargeable consideration attributable to the dwelling on a just and reasonable basis is £40k or more.

b) The dwelling is not subject to a lease which has more than 21 years to run at the date of purchase.

c) The purchaser owns an interest in another dwelling which has a market value of £40k or more and is not subject to a lease which has more than 21 years to run at the date of purchase of the new dwelling.

d) The dwelling being purchased is not replacing the purchaser’s only or main residence. [In fact, conditions c and d are not in this part of the legislation, but the effect is the same.]

There are then two tests which apply these conditions, and if one of these two tests is satisfied, then the higher rate will be payable.

First, the higher rate applies if two or more of the dwellings being purchased meet conditions a and b. So if, for example, you are buying five dwellings, the higher rate will apply, even if three of those dwellings do not meet conditions a and b.

If this test is not satisfied, you move to the second test: the higher rate applies if only one of the dwellings meets conditions a and b, and that one property also meets conditions c and d.

The consultation document suggested that an exemption from the higher rate might be introduced for purchasers of more than 15 dwellings or interests therein, but this exemption has not been brought into law.

Main residence exemption: a bear trap

A purchaser who has sold a main residence might expect to obtain relief from the higher rate if they purchase two dwellings under a single transaction within 36 months of that disposal. However, nothing could be further from the truth. If two or more dwellings are purchased in the same transaction and fulfil conditions a and b, then tax is paid at the higher rate on the total consideration, and there is no room for condition d. The fact that someone has sold a main residence within the preceding 36 months, or sells in the 36 months after acquiring the two or more dwellings, is disregarded.

So attention must be given to the timing of transactions. A purchaser who is intending to buy two dwellings as part of a single transaction might be better advised to structure it so that they buy each under separate transactions. In those circumstances, each transaction can be looked at individually, even though they might be linked. If the main residence exemption is available, then the order of the two transactions is very important.

The usual compliance rules apply to SDLT returns on purchases to which the higher rate applies. If a previous main residence is sold within three years of paying the higher rate, a refund is available 

Purchase by a company

A company will pay the higher rate if conditions a and b only are met in respect of any one of the dwellings. In simple terms, this means that the first purchase of a dwelling by a company will attract the higher rate. 

Other points to note

Multiple dwellings relief

Where two or more dwellings are purchased in a single or linked transaction, multiple dwellings relief under schedule 6B to the FA 2003 can be claimed. The higher rates apply for multiple dwellings relief. Where six or more dwellings are purchased in a single transaction, the purchaser can chose whether to apply the non-residential rates of SDLT under section 116(7) of the FA 2003.

Partnerships

Although HMRC deems a partner to own the underlying property held by or on behalf of a partnership, this principle does not apply to the higher rate. Provided a partner buys a dwelling for a purpose other than for the purpose of the partnership, the property owned by the partnership is disregarded when considering whether the purchasing partner owns an interest in an existing property. But it is only disregarded if the partnership is a trading partnership. It is unlikely that the transfer of a partnership interest comprises a major interest for the purposes of the higher rate.

Trustees

Purchases by trustees are treated differently depending on whether the trust is a bare trust, a life interest trust, or a discretionary (or other) trust. If a trustee holds as nominee, the trust is ignored, since ownership is deemed to lie with the beneficial owner. When a trustee of a life interest trust purchases a dwelling, the purchaser is deemed to be the life tenant, so the test is whether conditions a-d (either for purchasing a single or multiple properties, as appropriate) are satisfied by the life tenant. Where a purchaser is the trustee of a discretionary trust, the trustee is liable to the higher rate as if they were a company purchaser. So there is no requirement for the trustees to own an existing property. The higher rate will apply on the acquisition, by discretionary trustees, of a first property.

Inherited interests

An interest in a dwelling owned by an individual is disregarded if it was inherited in the three years before the acquisition of the second dwelling(s), and throughout that time, the beneficiary of the inheritance (and any spouse or civil partner of that beneficiary) has not had a (combined) interest which exceeds half of the major interest in that inherited dwelling.

‘Granny annexes’

It initially appeared that the higher rate would apply to ‘granny annexes’. However, on 11 April, the Treasury announced plans to make an amendment to the 2016 Finance Bill during its second reading at the end of June, to make purchases involving annexes exempt from the higher rate where the main residence and the annexe are purchased at the same time. It is intended that this change will be backdated to 1 April 2016. This has not yet become law and could therefore change.

Alternative finance

HMRC has recently spotted that the new regime does not apply as intended to alternative finance transactions. Such transactions involve more than one land transaction. The plan is to introduce an amendment which will apply to the purchase by the corporate financial institution, where the subsequent transactions are exempted from SDLT under the general alternative finance rules. The amendment will be backdated to 1 April 2016. HMRC has published a guidance note dated 14 April 2016 which explains that an affected purchaser may file their land transaction return on the basis of the changes identified in the guidance note, irrespective of the fact that they are not yet enacted.

Compliance

The usual compliance rules apply to SDLT returns on purchases to which the higher rate applies. If a previous main residence is sold within three years of paying the higher rate, a refund is available. It can be claimed by making an amendment to the original return. Repayments need to be claimed within three months of the sale of a previous main residence, or within one year of the filing date of the return, whichever is later. The repayment claim is on a specific SDLT repayment request form, which is now available from the gov.uk website. It will need to be completed online and the summary printed and posted to HMRC Birmingham Stamp Office. We are told that, in due course, an online form will become available, and an individual completing the form will need to verify their identity.

HMRC tells us that it aims to process all repayments within 15 working days of receiving the information required.