Nick Haines, Partner, Hazlewoods LLP, looks at the SDLT, the additional 3% charge and what it means for developers.
The past few years have seen an overhaul of the Stamp Duty Land Tax (SDLT) system in the UK. The most significant change for residential property developers, however, was announced in the 2015 Autumn Statement. Publicised as a mechanism to affect purchasers of second homes, the additional 3% SDLT charge has much wider-reaching implications.
Property developers will be affected whether they are operating through limited companies, partnerships or as sole traders. The position for sole traders is clear, if you own your own home and buy a residential property to develop, the additional 3% will apply. Additionally, for joint purchases where developers are acting in partnership, even if only one of the parties has an existing property the additional 3% will apply to the whole transaction.
For companies, the extra charge will always apply regardless of whether it is the first, second or subsequent purchase of a residential property in that vehicle.
As is shown in the table below, the top rate of residential property SDLT is increased to 15%. There is an exemption for properties worth up to £40,000 where no SDLT will be charged, however if the property is worth over £125,000 the whole initial band is taxable.
|Residential property value||‘Normal’ SDLT rate||‘Second home’ SDLT rate|
|Up to £125,000||Zero||3%|
|£125,000 to £250,000||2%||5%|
|£250,000 to £925,000||5%||8%|
|£925,000 to £1,500,000||10%||13%|
The impact can be significant; for example, a residential property purchased for £600,000 would suffer SDLT of £38,000 if subject to the additional charge, compared to only £20,000 for the same property if it were purchased as a main home.
Reducing the cost
The first thing to note is that mixed-use property (i.e. property with both a residential and commercial aspect) will not be subject to the charge. This is because mixed-use property is subject to commercial property SDLT. Critically, the tax is based on the property’s use at the time of purchase. If a developer buys a property that is mixed use at that time, the additional charge will not be levied, regardless of whether the developer intends to change the use of the property to wholly residential.
In addition, the purchase of six or more dwellings in a single transaction is treated as being a purchase of commercial property for SDLT purposes, therefore, no additional charge would be levied.
If the transaction does not qualify to be treated as a commercial property purchase through either of the two reasons above, then multiple dwellings relief should be considered as a way to reduce the SDLT payable. Multiple dwellings relief applies to purchases of more than one property. Using the relief means that the average consideration per property is assessed and the appropriate rate extrapolated from there. The lowest effective rate that can be achieved by using multiple dwellings relief is 4% for properties affected by the 3% surcharge.
For example, a purchase of three properties by a developer for total consideration of £1.2million would ordinarily result in SDLT of £99,750. However, by applying multiple dwellings relief the average property price of £400,000 (£1.2million divided by three) is used instead. As such the SDLT per property would be £22,000 which is an effective rate of 5.5%. The total SDLT for the transaction using multiple dwellings relief would therefore be £66,000 – a saving of £33,750.
Structuring the purchase of your development properties in the most efficient manner has never been so important. If in doubt, consult an SDLT expert, as the amount payable on your purchase may be considerably less than initially thought if the correct reliefs are applied.