STAMP DUTY LAND TAX – TEMPORARY REDUCED RATES

STAMP DUTY LAND TAX – TEMPORARY REDUCED RATES

The Chancellor has today announced the welcome news that there will immediately be a Stamp Duty Land Tax (“SDLT”) ‘holiday’ for all residential property sales from 8 July 2020 until 31 March 2021 inclusive.

The new reduced rates are applicable to all buyers of residential property, not just first time buyers, who will no longer have to pay SDLT on the first £500,000 of their purchase. SDLT Liability previously applied to any purchase over £125,000 (unless First Time Buyer’s Relief could be claimed).

These changes cannot be applied retrospectively and only apply to a purchase which takes place after 8 July 2020 and no later than 31 March 2021.

The rules are slightly different where you are buying a second home/investment property where you will still have to pay a higher rate of SDLT but will still pay less than previously. 

We explore the changes below.

Property Purchase (not a second home/investment property)

For anyone who is buying their first home or replacing their current home, or for any purchase of a property which will not result in you owning two or more properties, SDLT will not be payable on the first £500,000 of your purchase.

The rates of SDLT payable are as follows:

Property or lease premium or transfer valueSDLT rate
Up to £500,000Zero
The next £425,000 (the portion from £500,001 to £925,000)5%
The next £575,000 9the portion from £925,001 to £1.5 million)10%
The remaining amount (the portion above £1.5 million)12%

Examples:

Purchase of £250k – SDLT payable is £0

Purchase of £500k – SDLT payable is £0

Purchase of £600k – SDLT payable is £5000 (5% paid on the £100k over £500k)

Purchase of £1 million – SDLT payable is £28,750 (5% on £425k and 10% on £75k) 

Buying a second home or investment property:

When you purchase a second home or an investment property you were required to pay a 3% surcharge on the standard residential rates.  The surcharge still applies but you will benefit from the SDLT reduction referred to above.

Accordingly for a second home or investment property the rates of SDLT payable are now:

Property or lease premium or transfer valueSDLT rate
Up to £500,0003%
The next £425,000 (the portion from £500,001 to £925,000)8%
The next £575,000 9the portion from £925,001 to £1.5 million)13%
The remaining amount (the portion above £1.5 million)15%

Examples:

Purchase of £250k – SDLT payable is £7500 (3% on £250k)

Purchase of £600k – SDLT payable is £23,000 (3% on £500k and 8% on £100k))

Purchase of £1 million – SDLT payable is £51,250 (3% on £250k, 8% on £425k and 13% on £75k) 

This higher rate of SDLT can be avoided if you are replacing your main residence. 

Shared Ownership

The position on shared ownership has also improved.  SDLT on Shared Ownership is notoriously complicated and the position differs dependant on whether you are buying a new build or an existing re-sale property.  Both scenarios are covered below but the good news is that all buyers will certainly benefit from the change to SDLT until 31 March 2021.

SDLT for a Shared Ownership New Build Property

When you purchase a new build shared ownership property you are presented with two options for paying SDLT.  You can either pay on the price you are paying for your share and the rent or pay on the full market value (“FMV”).

Paying on the share and the rent (also known as paying in stages):

If you opt to pay on the share and the rent you will pay SDLT on the actual price you are paying to purchase your share in the property and on the Specified Rent i.e. the rent you are paying to the Landlord for the part of the property you do not own. 

The payment on the rent is calculated based on the Net Present Value (“NPV”) of the Lease; the simple explanation of NPV is the value of the rent over the life of the lease.  Today’s announcement has increased the threshold where NPV becomes payable from £150,000 to £500,000 meaning almost all buyers will not be required to pay SDLT on the rent.

It is rare to see a shared ownership where a buyer is purchasing a share worth more than £500,000 (although the FMV may be) and therefore until the 31 March 2021 almost all shared ownership buyers will be able to opt not to pay SDLT.

The downside to paying SDLT on the price and the rent is that you will be liable for further SDLT payments if and when you staircase above 80% ownership.

Paying on the Full Market Value “FMV” (also known as a market value election):

If you pay on the FMV of the property then you are making a market value election.  This means that you will pay SDLT on the rates shown in the table below on the full value of the property

Property or lease premium or transfer valueSDLT rate
Up to £500,000Zero
The next £425,000 (the portion from £500,001 to £925,000)5%
The next £575,000.00 (the portion from £925,001 to £1.5 million)10%
The remaining amount (the portion above £1.5 million)12%

Examples:

FMV  of £250k – SDLT payable is £0

FMV of £500k – SDLT payable is £0

FMV of £600k – SDLT payable is £5000 (5% paid on the £100k over £500k)

FMV of £1 million – SDLT payable is £28,750 (5% on £425k and 10% on £75k) 

When you make a market value election the positive outcome is that you will pay no further SDLT when you buy additional shares in the property.

So how do you decide what option to take?  Well this depends on your own circumstances of course and you should ensure you speak to your specialist shared ownership conveyancer for advice on the different options – although they cannot make the decision for you they can inform you what the different options mean to you both now and in the future. 

For example all buyers purchasing a property at a price of £500,000 or less will make a FMV election as this will result in no SDLT being payable under the temporary rules.   

However, some properties (especially in London) may have a full market value in excess of £500,000 and you will need to decide whether to pay on the share and rent (which is almost guaranteed to now result in no SDLT being payable) or the full market value where you would have to pay SDLT on the value over £500,000 

When you consider your options you need to think about what may happen in the future e.g. if you have purchased a 55% share are you likely to staircase to 100% ownership or are you likely to re-sell before you you are in a position to do this?  If the latter, in a scenario where the FMV is over £500,000 then you may be better off paying a lower SDLT payment now on the share and the rent as you will not have any benefit for paying on the FMV.

SDLT for a Shared Ownership Re-sale Property

When you purchase a shared ownership re-sale property (i.e. an existing non-new build) SDLT is simply paid on the usual rates as shown in the table above for the price you are paying for the property.  The rent payable for the property is not relevant for SDLT purposes and neither is the FMV.

The only other consideration is to establish whether the first buyer of the property paid on the share and the rent or made a full market value election as with the former this means you will still have to pay SDLT once you staircase over 80% ownership whereas with the latter you will not have to pay any SDLT for any subsequent staircasing transaction.

If you would like to discuss any aspects of this note or require any advice relating to Stamp Duty Land Tax or your property purchase please do not hesitate to contact us.

Adam Crawford

Partner & Head of New Build Homes

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