The chancellor in his Autumn Statement announced major changes to the way stamp duty land tax is calculated for residential properties, in force from 4 December 2014. Marlon Appleton helps you get up to speed with the changes, and what they mean for practititioners
What’s happened?
Under the old stamp duty land tax (SDLT) regime, which ended on 3 December 2014, SDLT was calculated on an all or nothing principle, sometimes known as the ‘cliff edge’. This meant that a residential property bought for £125,000 would incur no SDLT charge. However, if that same property cost £125,001, the SDLT bill would have been £1,250. In essence, the buyer was charged £1,250 in tax for paying an extra £1 for the property. This can be illustrated further by the old rates opposite:
| Purchase price old rates | |
|---|---|
| Up to £125,000 | 0% |
| Over £125,000 and up to £250,000 | 1% |
| Over £250,000 and up to £500,000 | 3% |
| Over £500,000 and up to £1 million | 4% |
| Over £1 million and up to £2 million | 5% |
| Over £2 million | 7% |
The new regime
These changes only affect residential property purchases with an effective date on or after 4 December 2014. Non-residential properties do not qualify and there needs to be a clear understanding of what is considered a residential property for SDLT purposes, because the layman’s definition will not suffice.
This reform will mean that, rather than a single rate of tax being charged on a purchase, each new SDLT rate will only be payable on the portion of the property value which falls within each band. Details of the new rates and bands are provided below. These new rates and bands will apply to residential property purchases completing on or after 4 December 2014, subject to the following transitional rules. Where contracts have been exchanged before 4 December but completed on or after that date, the purchaser can choose whether to pay tax under the old or the new rules. All those purchasing a property for less than £937,500 will pay less or the same SDLT under the new rules.
Example
The table opposite breaks down how the SDLT due on the purchase of residential property for £200,000 is calculated.
| Purchase price of property | New rates |
|---|---|
| Up to £125,000 | 0% |
| Over £125,000 and up to £250,000 | 2% |
| Over £250,000 and up to £925,000 | 5% |
| Over £925,00 and up to £1,500,000 | 10% |
| Over £1,500,000 | 12% |
Why is this important?
As a general rule, SDLT applies to all property transactions in the UK. Therefore any changes, however large or small, will be of pivotal importance to practitioners handling transactions that include:
• property purchases;
• companies and gifting property;
• gifting between spouses;
• SDLT and trustees; and
• options to purchase in wills.
Every transaction involving the transfer of residential property will be affected and, as the changes require more complicated calculations, the probability of errors being made is increased.
How does it fit into existing law and practice?
These new developments usher in no fundamental changes to existing law and practice, except to the rates of SDLT chargeable and the method of calculating the tax due.
In what way does it affect practitioners?
For clients, the reduced liability is a positive development. Conversely for practitioners, the changes present an increase in compliance risk. With calculations being more complicated, there is the probability that practitioners may submit incorrect returns leading to incorrect tax liabilities. The risk, in my opinion is high, since errors were at times made under the old SDLT regime with simpler calculations.
For example, the approach to taxing linked transactions will be different under the new rules. Where a series of transactions involve one that is non-residential, then all the transactions are taxed under the rules for non-residential or mixed use land.
Of similar importance are transactions involving multiple dwellings with non-residential components; here, the distinction and differences in tax calculations become even more important, and attention must be paid here in order to limit errors and the resulting taxation penalties for clients.
What should practitioners be doing differently as a result?
It’s quite commonplace for solicitors to voice their displeasure with the administration of SDLT. Quite rightly so, for this is one of those rare cases where they have to assume responsibility for a discipline for which they may not have the required level of expertise. Unfortunately for practitioners, this is unlikely to change anytime soon.
It has therefore become even more critical for practitioners to adapt the way they work and consider one or more of the following actions in order to protect clients from unwittingly paying the wrong amount of tax:
• obtain regular team training on specific areas of SDLT;
• outsource the SDLT function to SDLT specialists; or
• recruit an in-house tax specialist (part-time or full-time).
These are merely suggestions, and there is no certainty that practitioners make the necessary steps to bolster their SDLT services as it is simply a matter of choice. One thing is for certain – things cannot return to business as usual.
