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Penalty Stamp Duty rate – Will your purchase be affected?

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" (Government Consultation document)

The new higher rate of tax or new penalty has caused much concern amongst buyers and professionals alike, and with good reason.

After 'manic March' the dust has settled and we at Wards Solicitors have now had our first case where the higher rate tax, or penalty has had to be paid.

This involved an elderly gentleman whose family wished to assist him to buy his new property. They wanted this to proceed before his sale to enable them to make the new property suitable for his needs before he moved in. The consequences for them of the new tax was that they have had to find an additional £8,000 to fund it. They have also had to carefully consider how their investment, albeit temporary was organised. He will be able to recover the penalty when his house is sold, but had the arrangement not been structured carefully he may have found himself unable to do so.

So who is unaffected by the penalty? The penalty only arises in cases where when the transaction is concluded the buyer, as an individual, would own more than one residential dwelling. Therefore it is correct that first time buyers should be unaffected, and indeed most individuals who are moving house in the normal way would also be unaffected.

Examples of cases where the penalty would not be payable are as below in black type. Below each in bold and italics are given further information to illustrate some of the complications which may arise and where the penalty would arise:

  • John (is unmarried and not in a civil partnership and) is buying his first property as his new home.
  • John has parents who will provide the funds or a substantial amount of the purchase price and already own their own property. If they wish to protect their investment by being included on the property title, or by a declaration of trust then the purchase would attract the penalty as they own more than one property.
  • Emily (is unmarried and not in a civil partnership) and is buying her first property as an investment but will continue to live with her friends in a rented property.
  • Emily buys the investment property which is going well but falls out with her flatmates and wants to buy a property for her own occupation. This purchase would mean she owned two properties and this would therefore attract the penalty.
  • Louise (is unmarried and not in a civil partnership and) owns one property which is an investment property. She is selling this and at the same time buying a further property with her new boyfriend which they will then live in.
  • Louise discovers that her new boyfriend owns an investment property of his own and which he does not wish to sell. If they continue with the purchase in joint names the purchase will attract the full penalty. There is no reduction for Louise.
  • Jim and Jane (are neither of them married or in a civil partnership) (whether together or with another partner) and are buying their first house together and will own no other property.
  • Jim and Jane did not think that the flat Jim has in Scotland where he had been working for a time and intended to keep counted, but any residential property outside of England Wales and Northern Ireland still counts and if they purchase and Jim still owns the flat, their new purchase will attract the penalty.
  • Fred is in a civil partnership with Albert but buying a first property in his sole name, and Albert does not own any property in his name.
  • If Albert did own property then even though the new purchase was by Fred who owns nothing currently, the new purchase would still attract the penalty as Fred and Albert are treated as one person for the purposes of this tax as they are civil partners.
  • Maureen already owns her own home and is buying some land which has planning consent for a new house
  • Maureen's land does not attract SDLT at the residential rate. If however her purchase is not of land but is an 'off -plan' dwelling then this would still be treated as a dwelling even if it was not yet built. Therefore she would pay the penalty on this if she retained her existing property.
  • Tom has separated from his wife and this is permanent. He has moved out of the former family home and intends to transfer it into her name. He then plans to buy a property for himself to live in.
  • Tom finds his mortgage lender will not allow him to transfer the property to his wife. If he now buys he would have to pay the penalty although he may be able to reclaim this if the former family home is sold within 3 years.
  • Jeremy is buying what would be his first property but he does have an interest in a flat. This is not in his name and his interest is worth less than £40,000.
  • Jeremy does not have to be on the title of the property for this to be relevant. If the interest he held was worth over £40,000 then his new purchase would attract the penalty.
  • Margaret inherited a small share in her late father's house a year ago, but this has not been sold and she is now buying her own property.
  • Margaret's new purchase would however have attracted the penalty if her share in the inherited property was more than 50%, or had she inherited this more than 3 years before.
  • Victor and Helen need more room for their expanding family. They are selling their family home and will at the same time buy their new family home. They do however have an investment property which they let and will not be selling.
  • The sellers of their new home are impatient and the purchase is to now to complete before the sale. The penalty will have to be paid but can be reclaimed if the sale completes within 3 years.
  • Frank has found the bargain of a lifetime: a residential property to buy at under £40,000. He already owns several properties.
  • On further investigation it turned out that he had 3 bargains, and had agreed a deal to buy 3 properties at the same time all at under £40,000 each. For tax purposes the prices are added together and tax would be paid on the total. This would still be below the usual threshold of £125,000. However he would still have to pay the penalty at the 3% of the total. This would be the case whether or not he owned any other property.

Whilst the stated intention behind the new penalty is not to impact on home owners moving house in the usual way, but it may well do so more frequently than may be expected. In addition such a swift change in so complex an area inevitably brings with it some unexpected consequences.

The main exception to the penalty is where a buyer replaces their main residence and this will be the subject of a separate post.

A summary of the new penalty was posted 5 April :Higher rates of SDLT on the purchase of additional residential properties from 1st April 2016