What is Stamp Duty Land Tax (SDLT)?
Stamp Duty Land Tax (SDLT) is a tax payable on land transfers (including acquiring a major interest under a Lease) in England and Northern Ireland. Different rules apply in Scotland (Land and Buildings Transaction Tax is payable) and Wales (Land Transaction Tax is payable if the completion date is on or after 1 April 2018). This article will not specifically deal with properties in Scotland or Wales.
The current SDLT threshold is £125,000 for residential properties and SDLT is payable on a sliding scale, with the rate of tax rising with the value of the transaction. The SDLT payment will be 0% on values of up to £125,000, 2% on the next £125,000 (the portion from £125,001 to £250,000), 5% on the next £675,000 (the portion from £250,001 to £925,000), 10% on the next £575,000 (the portion from £925,001 to £1.5 million) and finally 12% on the remaining amount (the portion above £1.5 million).
What are the SDLT Rules for First Time Buyers?
Different rules apply to first time buyers. If you are purchasing your first home a discount may be available if the purchase completed on or after 22 November 2017 and the price is less than £500,000. This broadly applies to individuals who have not previously owned a major interest in a dwelling or equivalent interest in land anywhere in the world, which includes an inheritance or a gift.
Generally, if you are a first-time buyer, you will pay 0% on the first £300,000 and 5% on the amount above £300,000. If you purchase a property with someone else, i.e. a spouse or partner, and only one of you is a first-time buyer, SDLT will be due at the normal rates.
How Does SDLT Apply to Shared Ownership Properties?
When you buy a property through a shared ownership scheme, the SDLT rules work differently to the rules that would apply if you were buying a freehold or a normal leasehold property. Shared ownership properties are different because, whilst you may initially start with a 25% share, you can gradually purchase additional shares and increase your ownership to 100%. Upon reaching 100%, you may also end up owning the freehold of your property, if you have purchased a house, or the full leasehold interest if you purchased a flat. This is called staircasing.
If you are, for example, buying a property with a market value of £250,000, but you are only purchasing a 50% share of £125,000, which value is used to calculate your SDLT liability? Unfortunately, the answer is both! You have a choice about when and how you pay your SDLT and you need to consider this carefully, depending on your individual circumstances.
You can choose to pay SDLT when you purchase the property at the rate it would be due if you were buying 100% (the full market value), or pay tax in stages, i.e. on the value of the share you are purchasing. This is called a market value election. Why does this matter? When making your market value election, you need to consider if your intention is to acquire additional shares in the future, as your affordability increases. This could also be a consideration to give some thought to for when your fixed interest period expires on your mortgage and you may be considering a re-mortgage.
If you choose to pay SDLT on the full market value you will never have to pay it again, even when you staircase. You should always elect to pay tax on the full market value if it is no more than the SDLT threshold.
For example, if you purchase a 50% share at £60,000, the full value is £120,000, which is below the £125,000 threshold and the tax liability is nil. Even more advantageous if you are a first-time buyer and the full market value of your property is below the £300,000 threshold. If you choose to defer paying SDLT at the time you purchase the property, then it will be due on the market value of the shares you are purchasing when you reach a share of 80% or above, unless the current rules change.
But that’s not all – further complications!
In shared ownership transactions, if you are a first-time buyer, you will not be able to take advantage of the first-time buyer discount if you choose to pay SDLT on your share. For example, if you are buying 30% of a property valued at £450,000, your share would be £135,000. Even as a first-time buyer, your SDLT on the share would be calculated using the usual formula (2% on amounts between £125,001 and £250,000) and you will be liable for £200 if you chose to pay on the share and £7,500 if you chose to pay on the market value.
Unlike freehold properties, for newly created leasehold properties, SDLT is calculated not only on the price you are paying (the premium or the market value) but also on the amount of rent you are paying. With standard residential leases, the rent is usually a nominal figure of £0 to £250, so it has little impact on the tax calculation, but as the level of rent you are paying for a shared ownership property is usually higher this can have a significant impact on the amount of SDLT payable, even if your purchase price is below the threshold.
Following the same example as above, if the rent for the 70% you do not own is £8,662.50 per annum, this will attract an additional SDLT payment of £1,191. Usually, as a rule of thumb only, if the rent is over £4,000 per annum, this is likely to attract SDLT liability. The rent figure used in shared ownership transactions includes both the ground rent (rent normally payable under a Lease, such as that for a standard leasehold flat) if this is due before the final staircasing, and the specified rent (the rent payable on the share you do not own).
You may think it would always make sense to defer paying SDLT, especially if you are not intending to staircase your share of the leasehold up to 100% before you sell. However, you should note that when SDLT becomes payable later it will be based on the property values, tax rates and allowances at the point you come to purchase the remaining shares. If the market values rise, you could end up liable for more SDLT than if you had paid it at the outset. You should, therefore, consider this carefully before you decide on how you wish to proceed.
Should you require any further information, please do not hesitate to contact Bill Dhariwal, Managing Director, or Lesley Price, Head of New Build and Shared Ownership at Lawcomm Solicitors by e-mail on firstname.lastname@example.org or by telephone on 01489 864 115. Lawcomm Solicitors offer an award-winning conveyancing service to first-time buyers seeking to buy their first property and work as recommended solicitors to several housing associations and private developers on a nationwide basis. Contact us for a no-obligation discussion and estimate of costs.