From what the Chancellor said last Thursday 98% of buyers should be better off and will save tax. However it isn’t all plain sailing and there are some traps. Here are four of them.
1. Is it really a ‘residential property’?
Some clients will want to get the benefit of the lower tax rates but the property has to be ‘residential property’ to qualify for them. Note that all of the property has to fall within this definition to use the lower rates. If part of property is not within the definition of ‘residential property’ then it is a ‘mixed use’ property. The consequence will be that the commercial rates of SDLT will apply and the client won’t be one of the 98% of buyers paying less tax.
The test is quite strict and you have to look at s.116 Finance Act 2003:
The section says that “Residential property” means:
(a)a building that is used or suitable for use as a dwelling, or is in the process of being adapted or constructed for such use, and (b)land that forms part of the garden or grounds of a building within para (a) (including any building or structure on that land) (c)an interest in or right over that land..
and ‘non-residential property’ means property that is not residential property.
Also buying six or more residential properties together as part of one ‘deal’ is defined as not being residential property. This is so even if there are separate contracts and transfers that are not contractually linked.
2. When do you apply the test to see if it is ‘residential property’?
Well that’s another tricky one - its at the ‘effective date’ which is usually legal completion. However if the buyer gets the keys to the property after exchange of contracts but before completion (even if the seller also has a set of keys) this will be the date on which the test is applied.
To show how tricky it can be, take a client buying some bare land which has the benefit of planning permission for residential development. He gets access to the land on the date of legal completion. This is treated as being ‘commercial property’ for SDLT purposes as the test applies to the current use of the property, not any future proposed use .
Secondly if the buyer goes onto the land after exchange of contracts to start the building work on the bare site, then this will trigger the application of the test for residential property (not legal completion) - and it will still be taxed as ‘commercial property’. This is so even if the buyer has got the building work well under way before legal completion of his purchase takes place!
Now if the seller (not the buyer) has started the construction of some houses before the buyer gets access or legally completes the purchase then the property will be within the definition of ‘residential property’ and the lower SDLT rates will apply.
The danger is that if your client deliberately self-assesses a commercial property as residential property to claim the cheaper rates, HMRC could claim the extra tax back years later, plus interest and penalties.
3. Linked transactions
This is one of the most tricky areas of the whole tax as there is no clear definition of what makes two transactions ‘linked’ other than they are part of the same ‘deal’. Transactions can be ‘linked’ for SDLT purposes even if they are months or years apart, and even if there is no contractual link between them.
It is up to the taxpayer to be honest in his self-assessment of whether really, they are all part of a ‘deal’ between him and the seller, or anyone connected with either of them. HMRC’s guidance issued last Thursday gives an example of a £200,000 commercial property which HMRC assess as being ‘linked’ with two other previous residential transactions. The result is the tax payable rockets from £2,000 to £8,000!
4. Multiple Dwelling Property relief
The rules about the application of Multiple Dwelling Relief where a buyer buys a number of residential properties have changed. The result is trickier than you might think, and complex calculations may have to be made.
In conclusion, there are still some traps to fall into if you are not careful. Part of the secret of avoiding negligence claims or complaints is explaining to the client that this is a self-assessed tax like Income Tax, so they have to be completely open and honest with you about previous purchases and any other ‘deals’ that may be going on at the same time.
Further guidance and examples of the effect of the changes can be found here sdlt-guidance-note.pdf
I have also put together a helpful excel spreadsheet that calculates the tax treatment under the old new and commercial rates of SDLT.