Stamping on 'Buy-to-let'

Stamp Duty Land Tax ("SDLT") was enacted by the U.K. in 2003. Generally payable by purchasers of land or property, it is also paid on some lease transactions. SDLT was replaced in Scotland by the Land and Buildings Transactions Tax on April 1, 2014.

In the 2015 Autumn Statement, the Chancellor of the Exchequer, George Osborne, dropped a bombshell on prospective landlords by announcing a 3 percent SDLT surcharge on the purchase of additional residential property, such as holiday homes or buy-to-let. Delivering the blow, Osborne said: "Frankly, people buying a home to let should not be squeezing out families who can't afford a home to buy". Continuing the theme, HM Treasury’s Spending Review and Autumn Statement 2015 stated that "The government will use some of the additional tax collected to provide £60 million for communities in England where the impact of second homes is particularly acute". With warnings from the Bank of England that the U.K.'s financial stability could be jeopardised by the boom in buy-to-let, and its impact on the ability of young people to get onto the property ladder, the aim of the additional tax was to dampen demand from investors while improving housing availability for home ownership. The increase became effective from April 1, 2016.

For residential property, SDLT is charged at increasing rates for each portion of the purchase price as follows: (i) nothing on the first GBP125,000 of the property price; (ii) 2 percent on the amount from GBP125,001 to GBP250,000; (iii) 5 percent on the amount from GBP250,001 to GBP925,000; (iv) 10 percent on the amount from GBP925,001 to GBP1,500,000; and (v) 12 percent on the remaining amount over GBP1,500,000. The 3 percent surcharge applies at each band (including the 0 percent band), and increases these rates to 3 percent, 5 percent, 8 percent, 13 percent and 15 percent, depending on the band. Property is excluded from the higher rates where the consideration for the transaction is under GBP40,000. The impact of the surcharge is substantial, with SDLT on a GBP200,000 buy-to-let rising from GBP1,500 to GBP7,500, and the previous GBP15,000 tax on a GBP500,000 property now GBP30,000. Overall, HM Treasury expects the measure to raise more than GBP600 million.

Unsurprisingly, the additional tax was greeted by criticism in some quarters. Described as "catastrophic news" for the private rental sector by the Association of Residential Letting Agents' and "ill-designed" by the Institute for Fiscal Studies, many in the property industry anticipated increased rents to cover additional costs and a purchasing stampede as investors rushed to beat the April 1 deadline – neither assisting "Generation Rent" whom the government wanted the measures to benefit. Combined with new rules from April 2017 restricting mortgage interest relief for individual landlords to the basic rate of income tax over a period of four years, and denial of the capital gains tax reduction for chargeable gains announced in the last Budget, the government's direction on buy-to-let looks clear.

Buy-to-let investors should bear in mind, however, that until April 1, 2016, they did see some benefit from previous changes to the SDLT regime. Reform in December 2014 saw calculation of the tax on residential property moving from the old "slab" system, under which SDLT was applied at a single rate to the entire price of the property, to the current progressive "slice" system leading to an immediate reduction in SDLT for 98 percent of buyers with only properties over GBP937,000 seeing any increase. The SDLT on a GBP300,000 property, for example, fell from GBP9,000 to GBP5,000.

The SDLT surcharge applies to most purchases of additional residential property in England, Wales and Northern Ireland where, at the end of the day of the transaction, an individual purchaser owns two or more residential properties and is not replacing their main residence. The new charge also applies to a company even if the property will be its only residential property. According to HMRC, the "vast majority of transactions, such as first time buyers purchasing their first property or home owners moving from one main residence to another will be unaffected." The mechanics of the new charge are complex, however, with traps for the unwary catching out more than just buy-to-let investors and holiday home owners.

Although selling and replacing a main residence will not usually attract the SDLT surcharge (even if other property is owned), a delay in selling the former main residence will lead to the higher rates of SDLT applying to the replacement at a time when finances may be stretched, although a refund of the additional tax can be claimed from HMRC if the original main residence is sold within 36 months. In a post-Brexit world of possibly falling property prices, this will be of concern to someone buying a new home while holding onto their former main residence until the desired selling price is achieved. Also caught will be anyone moving house on a change of jobs who cannot simultaneously buy and sell.

The extensive reach and complexity of the SDLT surcharge is apparent in a number of circumstances. For example, married couples, and civil partners, owning a single residence between them at the end of the day of a transaction will not pay the higher rates of SDLT. They are treated as a single unit, however, so one of a couple buying a property will be liable for the higher rates if their spouse, or civil partner, has an existing residential property. This treatment does not apply if the couple are either legally separated (by court order or deed of separation) or they are separated in circumstances in which the separation is likely to be permanent. Parents helping their children onto the property ladder may also face the surcharge, depending on the structure of the transaction and on who owns the property purchased. For example, parents owning a main residence and buying a second property for their children to live in will pay the SDLT surcharge, so too if they purchase jointly with a child. Giving money for a deposit, however, or acting as guarantor on the mortgage without jointly owning the property will not attract the higher rates. Property situated overseas is also relevant when determining whether a purchase is an additional residential property or not, and a foreign homeowner buying an additional residential property in England, Wales or Northern Ireland will be liable for the surcharge.

The SDLT surcharge has complicated the conveyancing process, but whether it achieves the government's aim of helping first time buyers get onto the property ladder remains to be seen. Some buy-to-let investors will no doubt be deterred by the increased cost of buying a rental property, but equally the amount of the surcharge may simply be factored into the price that the buy-to-let landlord is prepared to pay. The consequences of Brexit may also muddy the waters if potential landlords are deterred by current uncertainty from making an investment in the property market. On the other hand, if Brexit leads to a downward trend in property prices, the potential increase in "yield" enjoyed by landlords on new purchases could perhaps make investing in buy-to-let more attractive, providing rents remain at today's levels.

By Robert Walker, Senior Editor, Global Tax Guide

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