Clause 117: SDLT: higher rates for additional dwellings etc
Clause 117 implements the higher rates of SDLT that apply to the acquisition of additional residential property and dwellings purchased by companies (‘the 3% surcharge’). The ‘higher rates for additional dwellings’ is to be distinguished from the SDLT ‘higher rate’ of 15%, the subject of clauses 118-120.
The consultation on this measure ran from 28 December 2015 and 1 February 2016 (less than five weeks), with draft legislation only published on 16 March 2016, just two weeks before the legislation took effect on 1 April 2016. We criticised this in our response to the Treasury Committee’s Inquiry into the shifting sands of UK tax policy and the tax base (see note on clause 116, above).
The short period in which to respond to a consultation involving a fairly radical change to the SDLT regime was challenging both for those responding and for HMRC in implementing the changes required in time for 1 April 2016. In its response to the consultation, the CIOT recognised that the tax consultation framework states that:
‘The Government will generally not consult on straightforward rates, allowances and threshold changes or other minor measures. It may also not consult on revenue protection or anti-avoidance measures.’
However, in the CIOT’s view, the introduction of the higher rates does not constitute a ‘straightforward’ rates change.
Complexity and administration
A fundamental concern of the CIOT is that the imposition of the higher rates will impose greater complexity on the SDLT regime which is not designed to make decisions about how a purchaser intends to use a property. Until now the question in rates terms was whether the acquisition is of a residential or non-residential property and, in the case of some reliefs or exemptions, the status of the purchaser. The higher rates will require value judgements about the quality of future and past occupation together with the need to retain and potentially submit appropriate evidence to HMRC to demonstrate that the higher rates do not apply.
The burden of administering the complexities of the higher rates will fall largely on conveyancers who may not have tax expertise. SDLT is already a highly complex tax but one that is now fairly well understood by practitioners specialising in the areas of tax and real estate. It is therefore of significant concern that the burden of administering the complexities of the higher rates will fall largely on conveyancers who mostly will not have tax expertise.
If a dwelling is purchased by more than one buyer and it would be a higher rates transaction in respect of any of the buyers, it is treated as a higher rates transaction and the higher rates apply to the whole of the chargeable consideration (Paragraph 2(3), Schedule 4ZA, Finance Act 2003). However, a joint purchase may be made for reasons that have a clear social value (such as parents assisting children to buy a first home, or adult children assisting elderly parents in purchasing a dwelling).
The consultation recognised that it is common for parents to help their children on to the housing ladder as first time buyers. The underlying rationale of the policy to impose the higher rates is to support home ownership and first time buyers. The consultation implied (at Example 22) that gifting or loaning funds to children to enable them to buy a first home, or acting as a guarantor on the mortgage, offer solutions. However, particularly in the case of supported living (for example the parents of an adult child with a disability purchase a flat jointly to enable the child to enter supported but independent living), it is often essential for the parents to retain an equity interest. In addition, parents may not wish to lend to their children for entirely valid and sensible reasons (such as concerns about the stability of a marriage or a risk of a business default).
Q21 of the HMRC guidance note has an example:
Q21. I am helping my son purchase a property that will be his main residence. My son is a first time buyer but I own another property which is the family’s main residence. I will have a 30% share in the property and my son a 70% share. Will we have to pay the higher rates of SDLT?
A21. Yes, the higher rates will apply as following the purchase you will own an interest in an additional residential property and will not have replaced your main residence, i.e. sold your current main residence and purchased a new one.
In the summary of responses to the consultation, the Government (at paragraph 1.15) pointed to the complexity involved in operating some method of apportionment between joint purchasers, and also a risk of non-compliance. You may wish to probe this answer given the existing complexities and the initiatives to enforce disclosure of the beneficial ownership of property.
Acquisition of more than one dwelling
Paragraphs 5 and 6 of Schedule 4ZA set out two tests to determine whether a single transaction involving the acquisition of more than one dwelling is a higher rates transaction (ie whether the 3% will apply to the price for all the dwellings purchased).
As HMRC Guidance at para 4.7 notes:
If two or more dwellings are purchased in the same transaction and at least two of them are worth more than £40,000 and are not reversionary on a lease with more than 21 years to expiry then the transaction will be a higher rates transaction. This is irrespective of whether the individual owns an interest in another dwelling at the end of the day or whether one of the purchased dwellings replaces a main residence.
Similarly Question 23 of HMRC’S Guidance Note has an example:
Q23. I am purchasing two flats in the same block in a single transaction. I intend to live in one of the flats and rent one out. I own no other residential property. Will I be exempt from the higher rates of SDLT on the flat that I intend to live in?
Q23. No, the higher rates will apply to the purchase of both flats, although you will be able to claim multiple dwellings relief on the purchases. Under multiple dwelling relief the SDLT due in based on the average value of each flat, rather than the total amount paid for both.
The SDLT higher rates are therefore due on the acquisition of both dwellings despite the fact that one will be the only or main residence of the purchaser. In addition if the purchaser bought the main residence first and then, in a separate later transaction bought another flat, the higher rates would only apply to the purchase of the buy to let flat although the transactions would be linked.
The point here is that the timing of acquisitions of different dwellings may affect the overall SDLT liability making the position for advisers (particularly conveyancers) more difficult.
(Subsequently the government has recognised that an acquisition of a main home and a granny annex may be harshly affected by the 3% surcharge. During second reading debate (11 April 2016) the Government confirmed that it intends to table an amendment to the Finance Bill to exclude annexes (granny flats) from the higher rates of SDLT.)
Determining what is a replacement for the buyer’s only or main residence
As summarised at paragraph 3.1 of HMRC’s Guidance Note, the higher rates will apply to the purchase of a single dwelling by an individual if at the end of the day of purchase, Conditions A-D in paragraph 3 of Schedule 4ZA are met:
- Condition A - the chargeable consideration (broadly the price) is £40,000 or more;
- Condition B - the dwelling is not subject to a lease which has more than 21 years to run on the date of purchase;
- Condition C - the purchaser owns an interest in another dwelling which has a market value of £40,000 or more and is not subject to a lease which has more than 21 years to run at the date of purchase of the new dwelling; an
- Condition D - the dwelling being purchased is not replacing the purchaser’s only or main residence.
There are two parts to a replacement of a purchaser’s main residence 1) there must be a disposal of the previous main residence, and 2) the dwelling acquired must be intended to be occupied as the individual’s only or main residence.
For the first part of the test, it is intended that similar factors as for CGT private residence relief will be used to determine (retrospectively) whether a UK property is a main residence. While there will be no right to elect which residence is the main residence for SDLT, the CIOT thought it would be a useful simplification if existing CGT Principal Private Residence (PPR) elections are regarded as indicative for SDLT higher rates purposes. In the absence of the right to elect, the main residence for SDLT purposes may differ from that for CGT, an added element of complexity. The CIOT pointed out in the consultation response that it is important not to under-estimate the complexities in determining a main residence; there will be many different fact patterns that throw up difficult examples as is demonstrated by the substantial (and often contradictory) case law on the subject. An example of a common difficulty in deciding the main residence question is where the family home is in the country but one adult works and lives in London in a flat during the week
In respect of the second part of the test, a test of intention of future use is more challenging in the context of a transaction tax that is judged at a particular date (‘the effective date’) and adds new complexity to the SDLT regime.
If an individual owns a dwelling outside the UK, that dwelling is taken into account in deciding whether the 3% surcharge applies to the purchase of a dwelling in the UK (paragraph 16(1)).
In the CIOT’s consultation response, we highlighted two practical difficulties:
- Firstly, determining whether a foreign property is a main residence may be difficult as a question of fact particularly where non-residents own and occupy different homes in various countries.
- Secondly there are situations where it is difficult to establish ownership of a property in jurisdictions where land ownership is veiled by religious or family complexities. In some countries it is not uncommon for a female family member to own an interest in a foreign property but without any effective control over it such that their interest is only notional. In many foreign jurisdictions, property ownership may be by the whole family without distinguishing family members’ interests.
Similarly an interest in a dwelling may be held via a legal entity and the question of ownership may depend upon its legal form in the jurisdiction where it is established.
Current areas of uncertainty
Inevitably, given the haste with which the new regime has been implemented, there are a number of technical issues emerging where the application of the higher rates is uncertain. HMRC published a commendably early guidance note on 16 March 2016. In the summary of responses to the consultation the Government said that HMRC will continue to monitor the use of guidance and the emergence of common queries and will keep guidance up to date (paragraph 1.67).
In this context we understand that the process of publishing guidance developed by HMRC on GOV.UK is sometimes delayed because it needs to be approved and published on GOV.UK by the Government Digital Service (GDS). If HMRC cannot persuade GDS that guidance is of sufficient priority to publish it immediately, we understand that it simply takes its place in the normal queue of items to be published and can therefore take some time. Where this relates to tax matters – particularly changes either recently or about to be introduced – published guidance is vital and it is unsatisfactory that timely published guidance is not available to taxpayers.
(NB. We have wider concerns regarding the guidance on GOV.UK – timeliness as noted above (including the rate at which outdated guidance is replaced with new guidance, and the position for taxpayers in the interim) as well as the technical accuracy of the guidance (some guidance ignores the complexities of the underlying regime and, in some instances, is simply wrong) – and we have made, and will make separate representations to HMRC in this area.)
Clause 118 - SDLT higher rate: land purchased for commercial use
This is a welcome additional relief from the 15% higher rate of SDLT.
One additional point we have raised with HMRC is that there are a number of new reliefs from SDLT in the Finance Bill 2016 (clauses 118-120 and clause 122). In relation to these new reliefs we reiterate a point made previously by the CIOT that Step B (Claims to relief) of The Stamp Duty Land Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2005 (2005/1868) should be updated without delay to exclude new reliefs from the SDLT DOTAS regime. These regulations concern the SDLT DOTAS regime under which promoters of avoidance arrangements are required to make a disclosure to HMRC. The SDLT DOTAS scheme differs from the direct taxes DOTAS in that it does not depend upon hallmarks of avoidance, instead it sets out a series of steps by which arrangements are excluded from being prescribed arrangements for the purposes of the regulations. Step B excludes certain claims for relief. The problem is that Step B is not updated quickly enough for new reliefs with the result that disclosure is required for what is a straightforward application of a relief, a result that is clearly unintended.
Clause 119 - SDLT higher rate: acquisition under regulated home reversion plan
Clause 120 - SDLT higher rate: properties occupied by certain employees etc
No comments, again two welcome additional reliefs from the 15% for home reversion plans and employee’s occupation (eg caretakers).
Clause 121 - SDLT: minor amendments of section 55 of FA 2003
Makes minor changes to how SDLT is calculated for non-residential and mixed property transactions. (See also clause 116.)
Again appears to be uncontroversial. We have had no representations or comments from members on this clause.
Clause 122 and Schedule 16 - SDLT: property authorised investment funds and co-ownership authorised contractual schemes
This legislation aims to remove barriers to the use of particular ways of investing in property by introducing a new relief from SDLT and other changes.
We have had no representations or comments from members on this legislation, but we note that the accountants Smith and Williamson have said:
“It is understood that this measure is aimed at encouraging the relocation to the UK of property portfolios supporting pension funds in run-off, which are currently managed offshore. It is only likely to be relevant to substantial property portfolios. Once this measure is introduced it will be interesting to see whether it will be extended to other tax-favoured property investment vehicles such as real estate investment trusts.”
Additionally the Chief Executive of the Association of Real Estate Funds has said:
“On the positive side, the PAIF and CoACS regimes offer tax efficient structures in property enabling the best possible returns for investors. We expect to see a new wave of PAIFs and CoACSs being created. Less tax efficient vehicles will be able to convert without being hit with a tax bill. We are, however, disappointed that the government has not listened to industry calls to accommodate unit-linked funds within these new provisions.”