Let’s Talk About Tax
Let’s talk about tax, more specifically, Stamp Duty Land Tax (SDLT). Ben Franklin once wrote that in this world nothing is certain, except death and taxes. So before succumbing to the former, we all have to endure the latter. In this article we introduce the basic principles of SDLT.
Although there are a lot of variables involved with calculating SDLT there are a few basic principles that will always remain the same. The first is that an SDLT return must be submitted to HMRC and any associated tax paid within 30 days of the completion of an acquisition. Failure to so will result in you being liable for a late payment penalty as well as interest charged against the amount owed. Another constant is that SDLT will always be charged against the total consideration in the transaction. This will usually be the price you pay for the property but can also mean other forms of payment such as goods or services rendered. It is important to work out the total value of the consideration in order to calculate your liability for SDLT. A final point to consider at the beginning of the process is whether the transaction qualifies for either a relief or an exemption from SDLT. These issues are touched on later in the article.
The first step towards calculating your SDLT liability is to identify whether your property is residential or non-residential. This is usually self-evident but in some cases the distinction is not so clear. The first we are going to look at is residential.
The definition of a residential property is provided by the Finance Act 2003. Section 116 states that residential property is:
- A building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use;
- Land that is or forms part of the garden or grounds of a building within paragraph (a) (including any building or structure on such land); or
- An interest in or right over the lands that subsists for the benefit of a building within paragraph (a) or of the land within paragraph (b).
Once you have confirmed the property is residential the next point to consider is whether you are acquiring a freehold or leasehold interest. This is important as it will affect how your SDLT liability is calculated. Either way, the first step is the same as you will pay SDLT on increasing portions of the freehold purchase price or leasehold premium at the rates set out below:
|Freehold Purchase Price Or Lease Premium||SDLT Rate|
|£925,001 – £1,500,000||10%|
|Any portion above £1,500,000||12%|
The difference between acquiring a leasehold interest and a freehold interest is that with a freehold interest, the calculation is now complete. But with a leasehold interest you must also consider the SDLT liability on the net present value (NPV) of the lease. SDLT is charged at a rate of 1% on any portion of the NPV over £125,000. The NPV is based on the total rent over the life of the Lease and can be worked out using HMRC’s SDLT calculator on their website. In order to consider the above we will use Ben as an example. Ben is purchasing a freehold interest in a residential property for a total consideration of £325,000. His SDLT liability is calculated at as follows:
£0-£125,000 @ 0% = £0
£125,001 – £250,000 @ 2% = £2,500
£250,001 – £325,000 @ 5% = £3,750
Therefore Ben’s total SDLT liability would be £6,250.
An important point to consider is that as of 01 April 2016 you will have to pay an additional 3% on top of the normal rates of SDLT if buying a new residential property will mean you own more than one. If the property you are buying is to replace your main residence which you have already sold, then you will not incur the addition 3% on the SDLT rates. However, if when you complete the purchase of a residential property you have not sold your main residence then you will have to pay the higher rate as you will own two properties. You may be able to claim back the extra money paid if you sell your previous main residence within 36 months.
A non-residential property is one that falls outside the definition of a residential property. It can be, amongst other things, commercial property or agricultural land. Property that has a mixed use in that it has both a residential and non-residential element, eg a shop with a flat connected, will be considered a non-residential property for SDLT purposes.
The format for calculating your SDLT liability will be similar to considering a residential purchase, save for the rates applied as set out below.
|Freehold Purchase Price Or Lease Premium||SDLT Rate|
|Any portion above £250,000||5%|
If you are acquiring a leasehold interest in a non-residential property you are liable for SDLT on the premium of the lease charged at the non-residential rates set out above as well as SDLT on the NPV. The rate at which SDLT is charged on the NPV on non-residential leases is set out below.
|Any portion above £5,000,000||2%|
It is important to remember that if you are taking an assignment of an existing lease you will only be liable for SDLT on the premium and not on the NPV.
To help illustrate the above, let’s check in with Ben again. Ben’s business is doing well so he has decided to take a lease of new commercial premises. The term of the lease is 10 years, the rent will be £30,000 per annum and the premium he paid for the lease is £200,000. Ben’s SDLT liability is calculated as follows:
SDLT on premium – £0-£150,000 @ 0% = £0
£150,001-£200,000 @ 2% = £1000
SDLT on NVP – £0-£150,000 @ 0% = £0
£150,001-£249,498 @ 1% = £995
Therefore Ben’s total SDLT Liability is £1,995.
It is important to note that these non-residential rates apply to transactions completing on or after 17 March 21016. If contracts were exchanged before that date but completion took place on or after 17 March 2016 the purchaser can elect to pay SDLT under the old or new rules. Generally the new rules and procedure will result in a lower SDLT liability. However, a transaction with a consideration greater than £1,050,000 will incur a lower SDLT liability under the previous rules.
Reliefs from SDLT
There are some reliefs available that can reduce the amount of SDLT that is payable. These include a charities relief or when property is being transferred within the same group of companies. However, the majority of transactions will not be considered eligible for relief. If you need more information regarding the reliefs available, there is information on HMRC’s website or speak with a qualified tax consultant.
In most circumstances you will need to submit an SDLT return, even if the there is no tax due. Failure to do so will result in having to pay a penalty charge. However, there are some circumstances in which the transaction will be exempt from SDLT and you will not have to file a return. Circumstances such as this include when buying freehold property for less than £40,000 or when property is left to you in a will. For further guidance on exempt transactions please see HMRC’s website or speak to a qualified tax consultant.
The above article provides a brief guide on some of the main aspects of the SDLT process. If you require legal advice on the implications of SDLT please contact a member of our Real Estate team. Please note, Tughans are not tax advisers and therefore do not provide any advice relating purely to tax or tax planning. All figures correct as of 01 August 2016.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.