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Stamp Duty Land Tax

This article gives a brief introduction to the main points to consider in relation to Stamp Duty Land Tax when undertaking a transaction in property.

Stamp Duty Land Tax
In the UK when purchasing or transferring ownership of land and property there may be a charge to Stamp Duty Land Tax (SDLT) if the value of that land or property is over certain limits. Any purchase or transfer of land and property must be reported to HM Revenue & Customs (HMRC) in the form of a an SDLT Return, even if there is no tax payable on the transfer. The rate of SDLT payable is dependent on whether or not the property transferred is residential or non-residential in nature (and also whether or not it is an outright purchase or a lease that is being transferred.

Stamp Duty Rates and Threshold
In general SDLT will be charged as a percentage of the purchase price or lease premium and, as you would expect, the higher that value the greater the liability to SDLT. The tax rates are generally between 1% and 4% and SDLT is charged on the full property price rather than just the excess over the threshold. The purchase price does not include the value of any freestanding furniture or carpets.

Residential Properties
The special threshold for residential land and property in operation between 3 September 2008 and 2 September 2009 is £175,000 unless the lease is for less than 21 years. If the transaction involves a new lease with a substantial rent there may be an additional SDLT to that shown below. The following SDLT rates apply for the purchase price/lease premium or transfer value:

  • £175,001 to £250,000 – 1%
  • £250,001 to £500,00 – 3%
  • Over £500,000 – 4%

If a residential lease is granted for a term of less than 21 years or the assignment of an existing lease which has less than 21 years to run then the normal threshold of £125,000 continues to apply (£150,000 if located in a disadvantaged area).
When a new residential lease has a substantial annual rent then SDLT is due on the lease premium (purchase price) and the Net Present Value (NPV) of the rent payable. The NPV is based on the total rent over the life of the lease. If the NPV of the rent is below £175,000 then there will be no SDLT due but if the NPV is over £175,000 then SDLT will be charged on 1% of the value that exceeds the normal threshold level of £125,000.

Non-Residential Properties and Mixed Use Properties
Non residential property includes shops and offices as well as agricultural land. Mixed use properties may include a shop with a flat upstairs.
The table below applies for freehold and leasehold non-residential and mixed use purchases and transfers. It is also important to note that if the transaction involves the purchase of a new lease with substantial rent then there may be an additional SDLT charge.


Purchase price/lease premium or transfer value (non-residential or mixed use)

SDLT rate

Up to £150,000 - annual rent is under £1,000

Zero

Up to £150,000 - annual rent is £1,000 or more

1%

Over £150,000 to £250,000

1%

Over £250,000 to £500,000

3%

Over £500,000

4%

Reliefs and Exemptions
There are a few areas where relief can be claimed on your SDLT return these include:-

  • Zero carbon homes. If your home qualifies as an energy efficient, zero carbon home, no SDLT will be chargeable if the house costs less than £500,000. For such properties costing over £500,000 there is a maximum £15,000 reduction in the amount of SDLT tax due.
  • If an employer buys an employee's house because they are relocating due to work commitments there is no charge to SDLT provided the following conditions are met:-
    • The employee lived in the house as their main or only residence during the two years before the employer buys it.
    • The employer is buying the house because the employee is obliged to move as a result of their job.
    • The employer doesn't pay more than the market value for the house.
    • The area of land purchased is less than 0.5 hectare.
  • When a house building company buys a home from an individual who is buying a new home from the company is exempt if:-
    • The individual has lived in the house at some point in the last two years and it is their main or only residence before the house builder bought it.
    • The individual must buy a new house from the house building firm.
    • The new house must be used as the individual's main or only residence.

However no relief is available if individuals swap homes. Disadvantaged area relief has been suspended for the moment as the residential threshold has increased until 2 September 2009.
There are certain exempt transactions that do not have to be reported regardless of their value. These include:-

  • Property transactions where no money changes hands or no other monetary exchanges take place (note: a gift of a property with attached mortgage will constitute a chargeable transaction and SDLT will be payable on the value of the mortgage transferred).
  • Property left in a will, including property that has an outstanding debt on it e.g. a mortgage. This exemption also applies to transactions which change the terms of the will so another individual benefits from the property.
  • Divorce or dissolution of civil partnership. When partners decide to split their land and property between them or the property is split following a court order there is no need to inform HMRC.

In addition HMRC do not need to be informed about the following:-

  • Freehold transactions of less than £40,000.
  • Leasehold purchases of leases of seven or more years where the value is less than £40,000 and the annual rent is less than £1,000.
  • Leasehold purchases of leases of seven years or less where the total value of the transaction isn't more than the residential or non-residential threshold.

Linked Transactions

Sometimes where two or more property transactions are carried out between the same buyer and seller, the transactions are treated as being 'linked' for Stamp Duty Land Tax (SDLT) purposes. People connected to a buyer or seller can count as being the same buyer or seller. If two transactions are linked the total value of both transactions are taken into account in calculating the liability to SDLT. In most cases this will mean that a higher amount of SDLT will be payable in comparison to where the transactions are not linked.
HMRC will consider transactions to be linked if all of the following apply:

  • there is more than one transaction
  • the transactions are either between the same buyer and seller or between people connected with either of them
  • the transactions form part of a single arrangement or scheme or part of a series of transactions

The definition of a connected person is quite broad, it does not only refer to spouses but also includes more distant relatives such as brothers and sisters, parents, grandparents, and even your spouse's relatives. If the buyer or seller is a business, a connected person would include business partners and their relatives. It also includes companies and groups of companies who are connected to the business.
Linked as part of single arrangement
Transactions may be linked because they're part of the same single arrangement or scheme, regardless of whether or not they are separately documented.
For example, if a house is sold in such a way that Mr Gray purchased the house but his wife Mrs Gray bought the garden, the two transactions would be linked due to the fact that Mr and Mrs Gray are connected and they are buying things from the same seller as part of a single arrangement.
By virtue of the fact that the two transactions are linked as part of a single arrangement, they're treated as one transaction for SDLT purposes with the result that the values of the individual transactions are added together and SDLT is payable at the appropriate rate on the total value (subject to the usual thresholds).
Linked as part of a series of transactions
Sometimes a purchase is followed by one or more related purchases. Related purchases can be treated as linked transactions for the purposes of SDLT if there is something to link all the transactions together. There's no limit on the length of time between the transactions.
For example, a property investor may agree to buy three new houses from a builder. Due to the fact that they are buying three houses they get a discounted price of £180,000 for each house on completion rather than their full market value of £200,000 each.
In this scenario, the three transactions are linked as part of a series. As a result SDLT is payable on the total value of the three transactions i.e. £540,000. The buyer will therefore incur an SDLT liability of £21,600, being 4 per cent on £540,000.
If the transactions in the above example hadn't been linked, SDLT would have been payable at the lower rate of 1 per cent on the value of each individual transaction. The total SDLT would therefore be £5,400, being 1% of £180,000 multiplied by 3. This may have been the case if the speculator had bought each of the three houses from the same builder in three completely separate transactions with no prior arrangement to purchase the other houses.

Be careful

As ever, tax is not straightforward. If you would like to discuss Stamp Duty Land Tax in detail or how it affects any proposed transactions, please do get in touch.

 

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