In my previous post on 17 December 2015 I reported on the changes as far as they were then known:
The Consultation is open up to 1 February 2016 and the final detail is to then be published in the budget on 16 March 2016 with the new higher rate tax being effective on 1 April 2016. The consultation brings in some important new information providing 42 examples and asking 21 questions.
The basis of the original proposition was that the higher rate applied to where the buyer already owned a property. It was the number held not the use which was the focus. This has now changed with the introduction of the term ‘main residence’, essentially to rescue those cases where buyers may own more than one property and allow the replacement of the main residence only. It is a very limited exception. There is no general exception for main residences.
It is also clear that some of the manoeuvring that buyers may have considered to manage the changes, in terms of splitting ownership of assets, will also not work as married couples/civil partners will be treated as one unit. In addition there will be no discount on the rate for joint buyers if one of them only owns a second property. There can also be no election of which property should be the main residence.
The starting point is that the higher rates will apply if “at the end of the day of the transaction” an individual owns more than one residential property, irrespective of the intended use of the property.
However there is to be an exception so a buyer may replace their main residence without paying the higher tax even if they may still own two properties. That is to sell their main residence and replace with this a new one, either at the same time or within 18 months.
There is however no exception where a first main residence is the second property to be acquired without any sale, or if there is a sale which funds the purchase which is not of a main residence. In each case where at the end of the day the buyer will own two or more properties the higher rate tax is payable on the second purchase.
The examples given in the consultation 6-10 are set out in full:
Z already owns a main residence and is purchasing a property that will be used as a buy-to-let. At the end of the day of the transaction she owns two properties and has not replaced her main residence, so the higher rates will apply.
A owns both a main residence and a second home. She sells her main residence and purchases a new one. Although she has two properties at the end of the day of the transaction, she has replaced her main residence so the higher rates will not apply.
H owns a main residence. He is purchasing a new main residence, but rather than selling his previous main residence he will rent it out. At the end of the day of the transaction H owns two properties and is not replacing a main residence (as he is not selling his previous main residence), so the higher rates will apply.
N purchases her first property, which she will use as a buy-to-let. At the end of the day of the transaction she owns one property, so she will not pay the higher rates of SDLT, even though she is not using it as her main residence.
Two years later, N purchases a residential property which she will use as her main residence, but she decides to keep her buy-to-let property. In this instance, as she has two properties at the end of the day of the transaction and has not replaced a main residence (as she has not sold a previous main residence), the higher rates will apply.
O is a buy-to-let investor with 10 residential properties in his portfolio. He also owns one residential property which he uses as his main residence. He decides to sell his previous main residence and purchase a new main residence.
At the end of the day of the transaction, he owns 11 properties – his new main residence and his 10 buy-to-let properties. However, as he has replaced his main residence he will not pay the higher rates of SDLT.
Main residence test
The buyer will not be able to elect which property they own is their main residence, as is possible for other taxes. HMRC will take into account a number of factors when considering whether a given property is an individual’s main residence. These will include:
There is proposed to be a two step test to see if the main residence is being replaced. The first is one of fact- whether the sold property was the only or main residence in the past 18 months. The second is of intention- if the new one is intended to be occupied by the buyer as their only or main residence.
Purchase before sale
Where a new main residence is purchased before the current one is sold, at the point of the completion of the purchase the buyer will own two properties and will be liable to pay the higher tax. This would be payable on the purchase completion but a refund could be claimed where the sale is completed within 18 months.
Mr and Mrs K own one property, which is their main residence. They decide to purchase another property, which they will use as their main residence, but decide not to sell their previous main residence. At the end of the day of the transaction they own two properties and have not replaced their main residence, so the higher rates will apply.
Two months after this purchase, they sell their former main residence. Mr and Mrs K have disposed of a former main residence within 18 months of purchasing a new main residence. As such, upon sale of their previous main residence they will be eligible for a refund.
‘Foreign’ Main Residence
Property owned by a buyer will include any property owned outside of England Wales or Northern Ireland and the same rules apply. If the buyer buys a property in England Wales or Northern Ireland the new purchase will be subject to the higher rate if the buyer owns property elsewhere.
S owns a property in Scotland, which she uses as a main residence. She is purchasing her first property in England, Wales or Northern Ireland, which she will use as a second home. At the end of the day of the transaction she owns two or more properties globally and is not replacing her main residence, so she will pay the higher rates of SDLT.
T owns a property outside England, Wales and Northern Ireland which he uses as a main residence. He decides to sell that property and purchase a residential property in England, Wales or Northern Ireland. At the end of the day of the transaction he owns one residential property globally, so he will not pay the higher rates of SDLT.
Married couples/Civil Partners/Joint Owners
Married couples and Civil Partners are expressly specified as to be treated as one unit, with exceptions relating to divorce and separation. Such a couple may only have one main residence between them at a time. Therefore if one of them buys a further property this may be liable to the higher tax.
Mr and Mrs M are married. Mr M owns a home (which he purchased on his own before he was married) where the couple live as their main residence. Mrs M then buys a property to be rented out. At the end of the day of the transaction they own more than one residential property and are not replacing their main residence, so the higher rates will apply.
Whereas cohabitees buying property together cannot be treated as one unit in this way, if they buy together and one owns a property already it is proposed that they will be liable to the higher tax on the whole of the consideration, even though the other may for example be a first time buyer.
F and G own a property jointly. F decides to purchase a buy-to-let property on his own. At the end of the day of the transaction he owns two properties and has not replaced his main residence, so the higher rates of SDLT will apply.
B and C are purchasing a property together. This will be B’s first property, but C owns another property that she is not selling. For C, this will be an additional property as, at the end of the day of the transaction, she will own two properties and is not replacing a main residence. Therefore, the higher rates of SDLT will apply.
In recent years it has become common for parents to assist adult children with purchases. The structure of these will have to be considered carefully. A purchase by parents in their names for children to live in, or jointly with children will be subject to the higher charge where the parents own property already. Parents who own property with their children would benefit from the exemption when they sold and replaced their main residence. This however would not then apply to the children’s property. Where the parent gifts money for the purchase or acts as guarantor, but do not own the property, then the higher charge would not apply to that purchase.
A first purchase by a company of residential property will be liable to the higher rate of tax on that transaction. Therefore any purchase by a company of residential property will be subject to the higher rate.
A purchase by a company of residential property over £500,000 is already subject to a rate of 15% with exceptions for developers and chain breakers. There is no indication as to how the changes will sit with the existing rate and exceptions.
Additional rules apply where more than one dwelling is purchased at the same time and these reliefs are to continue taking the higher rate into account.
In general the beneficiary of the trust rather than the trustee is treated as the owner.
Large Scale Investors
The consultation is to consider if large scale purchases by companies or individuals of 15 or more properties should be exempt.
We will now have to wait for the Budget on 16 March 2016 for the final details of this these changes and how they are affected by the consultation. The time frame for the consultation is very short given the detail and importance of the changes, and there will be the inevitable unintended consequences as a result. Conveyancers will only have 9 working days between the Budget and implementation. With Easter wedged in the middle of this, it is going to be a very challenging indeed.