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Stamp Duty Land Tax (SDLT)

publication date: Sep 18, 2006
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Recent reports have shown that the annual Government take from Stamp Duty Land Tax (SDLT) has now reached £4 billion, with the latest quarter’s figures to June 2006 up 30% to £1 billion from the previous quarter’s £773.9 million

With the average SDLT liability now £3,735, Nick Haines, Tax Director at Hazlewoods LLP, considers the effect the introduction of SDLT has had on homebuyers, and offers some solutions to reduce its burden.

In the Beginning…..

Stamp Duty Land Tax (SDLT) was ushered in by the Government on 1 December 2003, although most will not have noticed a difference from the old Stamp Duty regime.

There were a couple of key changes that may have raised the odd eyebrow for a property buyer, most notably that the responsibility for the tax had suddenly moved from the solicitor acting on the buyer’s behalf, to the buyer.

Rather than their solicitor handling all the paperwork and corresponding with the tax office, all of a sudden a purchaser would have to sign a Land Transaction Return signifying that all the information contained in it was complete and accurate. If the Return is held to be inaccurate or late, penalties can be levied, and it is the buyer who will pick them up.

This, in itself, whilst a notable change, is no different to the way the Government has dealing with tax for years, having already changed Income Tax and Corporation Tax to a Self Assessment regime. SDLT was just catching up.

The second change was the fact that the nil rate band was different for residential and non residential properties. The smart money would have been that, to help first time buyers on the property ladder (with ever increasing property prices), the nil rate band for residential would be higher.

Perhaps we should not have been surprised, therefore, when the Government went completely the opposite way and set the nil rate band for residential property at £60,000 (the same as with Stamp Duty) but increased it to £150,000 for non residential. Who needs to help first time buyers?!?

Where we are now……..

Now, with a couple of increases in the nil rate bands over the past two years, the limits stand at:

Residential £125,000
Non Residential £150,000
Above these bands, the rates of SDLT payable are the same for residential and non residential:
Between nil rate and £250,000 1%
Between £250,000 and £500,000 3% Over £500,000 4%

Perhaps the strangest aspect (and most unfair) about SDLT is the way the rates are applied. With other taxes (Income, Capital Gains and Inheritance Tax), you will always benefit from the nil rate band. Perversely, as soon as you exceed the nil rate band, the whole value of the property is subject to SDLT at the rates above.

Is it any wonder, therefore, that some of the slowest moving properties are those valued at just over £125,000, £250,000 and £500,000. A £1 increase in property value from £250,000 to £250,001 can result in an increase in SDLT of £5,000 for the buyer. Some buyers may be tempted to appoint a certain level of consideration to fixtures and fittings to bring the amount subject to SDLT to below various thresholds. However, HMRC are aware of this trend, so do not be surprised if an enquiry is rained. The consequence of this is that many properties with a true value of £265,000 will only sell for £250,000, as buyers are not willing to expose themselves to the additional SDLT liability. So, we have a tax that provides little help to first time buyers (particularly in certain areas of the country) and one that has an adverse effect on the market for certain valued properties.

Not just on freeholds……..

As you are no doubt aware, SDLT also applies on Leasehold interests, with the Government ditching the relatively straightforward rules under old Stamp Duty, and introducing a mathematical equation that Sir Isaac Newton would have been proud of!!

The consideration that is chargeable to SDLT is calculated by the Net Present Value (NPV) of the future rents to be received under the terms of the lease.

Any resulting value that exceeds the nil rate bands above, is charged at 1% on the amounts above the nil rate band, not the full amount as with freeholds. So, there is a discrepancy even within the same tax! Any premium received is treated separately and is subject to SDLT in the same way as for freeholds, except (just to make things more complicated), that if the annual rents exceed £600 per year, the nil rate bands detailed above, do not apply.

So, for example, a lease with an annual rent of £1,000, and a premium of £50,000, would give rise to an SDLT liability of £50 on the premium (1%). Lessees beware!

Back to the charge on rent. Once the NPV has been calculated, you would be forgiven for thinking that the worst is over. However, during the lease term, one must consider whether there has been an “abnormal” rent increase after the fifth year, by using another mathematical formula. If there has, the lessee needs to re-compute the NPV to assess if there should be additional SDLT to pay.

How HMRC are to police this, I am not quite sure, although good luck to them, because I find it difficult to believe that even lessees will recognise that there may be an additional liability.

Some relief……….

Disadvantaged Areas relief may still benefit some homebuyers, in that the nil rate band is increased to £150,000 where a residential property falls within a “disadvantaged area”. A postcode search on HMRC’s website can be used to find out whether the home will qualify.

This used to be a much bigger benefit when the nil rate band for residential property was £60,000, but now that it is at £125,000, the number of properties that benefit has decreased significantly.

More relief – time to plan

So far, it has been pretty much doom and gloom, but there is light at the end of the tunnel. For properties valued over £500,000, there is some hope. With a little bit of planning, it may be possible to significantly reduce the buyer’s SDLT exposure. As with any planning, time is of the essence, so it is important that, if it is being considered, the appropriate steps are put in place as soon as possible after the offer has been accepted.

In the end………………

SDLT is seen by many as an unfair tax - why pay tax on purchasing a property, when you’ve already been taxed on the money you are using to buy it? It is seen by others as a curse on the housing market at certain levels (£255,000 to £275,000 and £505,000 to £550,000). Some (and probably far too many) sadly see it as a barrier to buying the home that they desperately want.

Forms of SDLT exist worldwide and our top rate of 4% compares favourably to other countries at 10%. However, it is still a significant cost which, if planned for carefully, could be significantly reduced.

SDLT – Caveat Emptor!

Nick Haines is a Tax Director at Hazlewoods LLP, a firm of business advisers and chartered accountants who have a specialist team offering advice to Estate Agents. This article has been produced as a guide to topics of current financial interests. We strongly recommend that you take professional advice before making decisions on matters discussed here. No responsibility for any loss to any person acting as a result of this material can be accepted by us.

For more information on SDLT compliance or planning, contact Nick Haines, on 01242 237661 or nmh@hazlewoods.co.uk