July 2020 SDLT Briefing

JULY 2020 BRIEFING – SDLT HOLIDAY

In Focus: Impact of the SDLT holiday on certain transactions

Following Rishi Sunak’s Summer Statement, Suzanne O’Hara looks in more detail at the impact of the SDLT holiday for residential property purchases.

Introduction

The government has announced an ‘SDLT holiday’ until 31 March 2021 in attempt to revive the residential housing market in reaction to the COVID-19 pandemic. The phrase ‘SDLT holiday’ is slightly misleading as there will still be SDLT to pay for properties valued at over £500,000 or for properties below £500,000 on which the 3% surcharge applies. However, the measures will provide significant savings (up to £15,000) and in many cases will take purchasers out of the charge completely.

Although the measures have been widely welcomed, they will not help those furloughed employees who are struggling to get a mortgage because of uncertainty around their future income.

Moreover, many economists predict a significant decrease in property values by March 2021 as a result of the on-going pandemic and Brexit; purchasers may have to weigh up immediate SDLT savings with a potentially significant drop in house prices.

That being said, it is likely that the measures will see a notable increase in transactions over the next few months.

Background

Since December 2014, SDLT on residential properties has been calculated using the ‘slice’ basis of tax, i.e. rates applied to the portion of the property value which falls within each band, rather than a single rate applying to the full sale price. From 1 April 2016, the 3% surcharge was introduced for certain acquisitions of additional dwellings and acquisitions by companies. The application of the 3% surcharge can be complex and professional advice should be sought in cases of doubt.

The applicable rates are illustrated below:

Residential rates

Relevant consideration	SDLT rate	Higher SDLT rate
Up to £125,000	0%	3%
£125,001 - £250,000	2%	5%
£250,001 - £925,000	5%	8%
£925,001 - £1,500,000	10%	13%
£1,500,001 +	12%	15%

However, following the Chancellor’s announcement in his Summer Statement, for transactions occurring between 8 July 2020 and 31 March 2021, the following rates should be applied:

Relevant consideration	SDLT rate	Higher SDLT rate
Up to £500,000	0%	3%
£500,001 - £925,000	5%	8%
£925,001 - £1,500,000	10%	13%
£1,500,001 +	12%	15%

The holiday therefore takes the form of increasing the Nil rate and 3% thresholds to £500,000. The changes announced do not affect the application of the SDLT statute book, simply the end calculation.

Impact

Jurisdiction

The changes only affect properties purchased in England and Northern Ireland. Scotland and Wales have their own rules for taxing land transactions. However, following the announcement of the SDLT holiday, Scotland has followed suit and announced an increase in their threshold from £145,000 to £250,000 from 15th July. Similarly, the starting threshold of the Welsh Land Transaction tax (LTT) will be increased from £180,000 to £250,000 from 27 July. Both increases will also apply until 31 March 2021.

When does it apply?

The SDLT holiday period for England and Northern Ireland runs from 8 July 2020 to 31 March 2021 inclusive.

It will generally apply to contracts completed or substantially performed during this period (the exchange date has no bearing for SDLT purposes).

Who does the SDLT holiday apply to?

Everyone, with one exception.

Anyone purchasing a residential property will benefit from the increased thresholds, except companies purchasing single properties valued over £500,000; the special 15% flat rate will apply in these circumstances.

Examples

Alan is purchasing a property valued at £250,000. The 3% surcharge does not apply. If he purchases the property during the holiday period, the SDLT will be Nil (compared to £2,500 when applying the normal rules).

Betty is purchasing a property valued at £495,000. The 3% surcharge does not apply. If she purchases the property during the holiday period, the SDLT will be Nil (compared to £14,750 when applying the normal rules.

Colin is purchasing a property valued at £950,000. The 3% surcharge does not apply. If he purchases the property during the holiday period, the SDLT will be £23,750 (compared to £38,750 when applying the normal rules).

The maximum SDLT saving during the holiday will be £15,000.

In practice this means that properties valued at £500,000 and over will achieve the maximum SDLT saving of £15,000. The SDLT savings are reduced as the value of the property is decreased below £500,000 (but no liability will arise on these purchases).

Special Cases

First-time Buyers

Relief for first-time buyers is also disapplied during the temporary relief period; instead, relief is simply obtained by applying the increased threshold.

This relief applied a special rate for first-time buyers purchasing property below £500,000; whereby the first £300,000 was exempt and the balance between £300,000 and £500,000 was taxed at 5%. Therefore, in practice first-time buyers will be obtain up to £10,000 additional tax savings during the holiday period.

Moreover, more first-time buyers will achieve increased tax savings as a result of the relief being disapplied, as in certain scenarios the relief was disallowed by virtue of, for example, previously holding inherited or gifted properties.

Multiple Dwellings Relief (MDR)

MDR can be claimed where a purchaser is buying multiple properties in one lot (or in a series of linked transactions), or if there is a secondary property in the same building or grounds that is suitable as a dwelling in its own right (such as an annex or granny flat).

A claim for MDR will, in effect, reduce the SDLT liability to that which would be paid if the properties were purchased separately, i.e. providing access to the multiple use of the lower rate charging bands. However, it is subject to a 1% de-minimis rule so that the SDLT under an MDR claim will always be at least 1% of the total consideration.

In normal times, a claim for MDR would always result in a lower SDLT liability.

However, care will be required during the SDLT holiday period as, in some cases, it will be more beneficial to claim the standard rates and avail of the increased 0% threshold than to claim MDR (as a result of the application of the 1% rule).

Examples

Doris is purchasing a property with a self-contained granny flat. The total value of the property is £530,000 and the 3% surcharge is not applicable.

A claim for MDR during the holiday period would result in an SDLT liability of £5,300 (1% de-minimis rule), whereas no claim would result in SDLT of £1,500. Outside the holiday period, a claim for MDR would have reduced the SDLT liability by £10,000).

Edward is purchasing a property with a main house which has a separate cottage in the same grounds. The total value of the property is £950,000 and the 3% surcharge is not applicable.

A claim for MDR during the holiday period would result in an SDLT liability of £9,500 (1% de-minimis rule), whereas no claim would result in SDLT of £23,750; a saving of £14,250. Outside the holiday period, a claim for MDR would have resulted in SDLT of £27,500 (without MDR £38,750).

Flo Ltd, a property development company is purchasing 21 apartments for a total of £3.2million (average price for each apartment is £152,380.95).

A claim for MDR during the holiday period would result in an SDLT liability of £95,999, whereas no claim would result in SDLT of £378,750; a saving of £282,751. Outside the holiday period, a claim for MDR would have resulted in SDLT of £107,499 (without MDR £393,750).

Non-residential/Mixed use properties

It should be stressed that it is only residential purchases that are impacted by the new changes; purchases of non-residential property or mixed-use property will be taxed in the same way as before, i.e. by applying the following rates:

Relevant consideration	SDLT rate
Up to £150,000	0%
£150,001 - £250,000	2%
£250,001 +	5%

In recent years, there has been a flurry of cases considering the classification of residential property versus non-residential/mixed use. This is undoubtedly in reaction to the introduction of the 3% higher rates of SDLT.

Conversely, during the holiday period purchases of residential property will result in lower SDLT liabilities up to a value of £1,215,000 (standard rate transactions). For properties where the 3% additional SDLT would apply if it were residential, then it still always works out as less SDLT if the property is classified as non-residential or mixed-use.

Position from 1 April 2021

On 1 April 2021, the holiday period will no longer apply, and the standard rates and 3% rates will revert for residential transactions.

Moreover, the situation will become more expensive still for non-UK residents, as following the announcement at the Spring Budget, it is expected that an additional 2% surcharge will be introduced on top of the applicable rates. Therefore, non-residents could be faced with a top rate of 17% on purchases over £1,500,000.

It remains to be seen whether the government will achieve its desired effect to stimulate the property market and generate additional revenue to use elsewhere in the economy. However, it certainly seems likely that many purchasers will avail of the holiday to achieve significant savings.

SDLT is becoming increasingly complex. If in doubt, seek professional advice. As always, our team of specialist tax advisers are at hand to assist you with all property tax-related matters. Get in touch via our SDLT advisory service or emailing Suzanne.OHara@mooreni.co.uk