Why transferring SDLT from the buyer to the seller is not straightforward
It has been widely reported that, shortly before being elected Prime Minister, Boris Johnson gave support to suggestions by the Association of Accounting Technicians (AAT) that the liability to pay Stamp Duty Land Tax (SDLT) should be switched from the buyer to the seller. This idea leads to some interesting issues.
Currently, where a property is purchased, the buyer is liable to pay any SDLT due on the purchase.
The idea is that SDLT imposes an additional cost on the buyer that acts as a barrier to entering the property market or rising up the property ladder. By switching SDLT to the seller, new entrants to the market do not have to pay SDLT and those moving up in the market only pay SDLT on the value of the property they are selling not the property they are buying (which would be higher). People who are downsizing will pay more SDLT than they would under the current system (they will be paying SDLT on the higher value property – or even paying SDLT where they are not even acquiring a property). However, the idea is that, because they are downsizing, they will be releasing equity and so be able to afford the additional SDLT.
An additional suggested benefit is that it will remove the need for first-time buyers' relief. Anyone buying their first property will pay no SDLT in any event because they will not be selling a property.
Effect on pricing
Before looking at the some of the practical tax and non-tax issues that the suggestion raises, it is worth considering whether the switch from buyer to seller will actually have the desired effect of making it easier for people to enter the property market.
The property market is a market that is dominated by the limits of supply and demand, where every price is individually negotiated. Sellers are looking for the maximum amount they can get and buyers are limited by the maximum they want, or can afford, to pay. In each case, the seller and buyer are considering their position after taking into account their costs of sale and purchase – one of the most significant costs being SDLT. The effect that the cost of SDLT has on pricing and the ability to purchase a property underlies the additional three per cent charge for additional properties and the proposed one per cent charge for non-residents.
Looking first from the seller's perspective - take a seller, currently selling a property where they want to retain £500,000:
If the seller has to pay the SDLT on the sale, they will calculate the SDLT on a property sold for £500,000 at £15,000. Therefore they will now want to charge £515,000 in order to be happy. The SDLT on a property sold for £515,000 will actually be £15,750 – increasing the SDLT cost by £750 and leaving the seller with only £499,250! It is possible that the seller may not notice the extra cost when it is hidden by all the other costs of sale and moving. However, if the seller is clued up enough to work out the additional cost – in order to end up with £500,000, they will have to increase the price to £515,789 to leave £500,000 after SDLT – increasing the SDLT payable by another £39.
Looking at it the other way around, from the buyer's perspective - take a buyer who has a budget of £515,000 (including SDLT) to spend on a property:
Currently, the buyer would pay £500,000 to the seller and £15,000 to HMRC. If the seller pays the SDLT, when the buyer pays £515,000 (the maximum that the buyer can afford), the money will go £499,250 to the seller and £15,750 to HMRC.
Whichever approach is taken, either the buyer or the seller loses out - or they end up splitting the cost between them. The only one that wins is HMRC who take more tax either way - effectively, the SDLT rate has been increased. A measure supposedly intended to help buyers buy into the market will have had the reverse effect by increasing the costs of purchase.
Added to this, where there is uncertainty as to the SDLT treatment, as discussed below, the seller is likely to want to play safe and budget for the higher cost – potentially increasing prices further to the detriment of buyers.
Whilst the proposed arrangement may work with the "basic" SDLT charge there are two further possible charges to consider for residential property:
the higher (an additional three per cent) charge where the "higher rates for additional dwellings and dwellings purchased by companies"; and the proposed one per cent additional charge for non-resident purchasers.
A decision will have to be made as to whether these should be paid by the seller or the buyer. Making them payable by the seller will, theoretically give an added incentive for sellers to sell to UK residents purchasing their only or main residence. However, it may well be impractical for a seller to determine whether these charges should apply and so it is likely that these costs will have to remain with the buyer as a supplementary tax return.
In addition, the proposal has only been discussed in relation to residential property – and it is the residential market that it is intended to address. However, in practice, it appears that it would have to apply to non-residential transactions as well. For some transactions, there are questions as to whether the purchase should be treated as residential or non-residential. For example where property is being bought with adjoining land there may be arguments with HMRC as to whether the additional land is "grounds" of the main dwelling or non-residential – allowing the non-residential rates to be used (on the basis of the purchase being a mixed use transaction). Similarly, where more than six properties are being purchased in a single transaction, the purchase may be treated as non-residential or, alternatively, the buyer may treat the purchase as residential and claim multiple dwellings relief. Having liability switch between buyer and seller, depending on such issues is likely to be impractical.
In addition to the tax issues noted above, there are other practical considerations that can arise from the switch of liability.
Currently, SDLT is effectively policed by HM Land Registry. The buyer cannot register title to the property unless the SDLT return has been made (or valid reasons can be given to HM Land Registry as to why no return was needed). Where the buyer is taking a mortgage to pay for the property, the lender is likely to insist on the buyer's conveyancer ensuring that the SDLT return is made, and any SDLT due is paid, to allow the lenders charge over the property to be registered. In the extreme, if the buyer does not pay the SDLT, or HMRC subsequently assess that more tax is due, the buyer will generally have the property as an asset against which it can enforce payment.
If the seller is liable for the SDLT, it is difficult to see how the buyer's registration of title can depend on the seller having complied with its obligations. It may be possible to put requirements on the seller's solicitor to deal with SDLT before passing the sales proceeds to the buyer but this will raise its own practical problems and, in addition, cannot deal with the situation where SDLT is paid but HMRC subsequently assesses more tax.
A further question arises where the seller has a mortgage on the property. In a rising property market, it is to be hoped that the seller will have sufficient equity after paying off the mortgage to settle any SDLT liability. However, where a property is in negative equity, HMRC's claim over SDLT will lie behind the lender's charge unless the rules are changed. Even the proposed reintroduction of Crown preference in respect of certain taxes in the draft Finance Bill currently before Parliament ranks HMRC's claims behind those of fixed charge holders. Where the buyer pays SDLT, the system is self-policing – if the buyer cannot afford the SDLT, they won't buy the property, leaving for someone who can afford it to buy. Where a property is being sold under a charge, the seller has no choice, possibly leaving insufficient funds for HMRC to claim its SDLT.
The switch in regime will, itself, give rise to possible inequity. People who bought a property and paid the SDLT under the current regime would then have to pay SDLT again when they sell – effectively paying SDLT twice on the same property.
As indicated at the beginning, there are potentially good reasons for suggesting moving SDLT liability from buyer to seller. However, the switch of liability from buyer to seller would be a radical change and it is to be hoped that before making such a move, full consideration will be given to all of the possible implications.
Guest blog by Leigh Sayliss, Partner at Howard Kennedy LLP, and a member of CIOT's Property Taxes Sub-committee