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  • Reservation Agreements – All Rights Reserved?

    26 February 2021

    Introduction 

    Any purchaser of a property will be aware that stamp duty land tax (SDLT) may be due and payable to HMRC following completion of the purchase. This is calculated based as a percentage of the final purchase price. 

    The rates of SDLT are often much higher for purchasing a residential property than those for purchasing a non-residential property, particularly when the additional 3% surcharge is taken into account and also the 2% surcharge applicable to non-UK resident purchasers of UK residential properties from 1 April 2021. Purchasers of residential property often find themselves having to play ‘hardball’ with a vendor in terms of negotiation in order to afford their dream house in order to reduce their SDLT liability. 

    There are some reliefs from SDLT available on the purchase of a residential property, however those are reliant on particular facts. We have discussed previously the application of multiple dwellings relief and also purchases of dilapidated properties for example, here we discuss what impact the entering into of a reservation agreement with the vendor for the purchase of a property may have on the SDLT payable. 

    Reservation Agreements in auctions 

    Reservation agreements are quite commonly seen where properties are purchased at auction. It would be typical where the highest bidder attempting to acquire the property in question would pay a sum, usually a relatively small single figure based on a percentage of the final bid amount, to obtain the reservation agreement which would almost provide exclusivity and a timescale to complete the transaction.

    In this instance, the fee would not be credited against the total consideration as this fee would be shared between the estate agent/auctioneer and associated parties. However, from an SDLT perspective, no tax is due on amount of the reservation fee, tax is only due on the actual completion price. 

    Reservation Agreements for off-plan purchases 

    Reservation agreements are also particularly prevalent where residential property developers sell to purchasers ‘off-plan’, i.e., agreeing a sale before the construction of the property has commenced. 

    In this context, the reservation agreement enables a buyer (‘A’), to pay a reservation fee to the developer (‘B’) in exchange for the reservation of a plot of land until a specified date and at a pre-agreed price. 

    Following the entering into of the reservation agreement, the property is built and, once finished, contracts are exchanged and on paying the balance of the pre-agreed purchase price, the parties complete. It would be usual in this case for the reservation fee to credited against the pre-agreed purchase price that will be become payable in full on completion of the transaction.

    As this is fundamentally the purchase of a residential property, this will naturally result in the residential rates of SDLT being applicable to the transaction. However, where a reservation agreement meets a variety of conditions, it could in fact result in the transaction attracting the lower non-residential rates of SDLT. 

    Those conditions can vary dependent on each transaction, but obvious ones are that the transaction must be at an arm’s length price and the reservation agreement is genuine and legally enforceable, also the construction of the property is yet to be commenced at the date of the reservation agreement. It must be stressed that other conditions must also apply to each and every instance to increase the chances of applying the non-residential SDLT rates.

    Consider a quick worked example. 

    A residential property has been recently completed by a developer and an exchange date has been agreed with the buyer for 1st April 2021. The agreed completion price is £750,000 and the purchaser already owns a private residence and the intention is for this new purchase to be an investment. As such, the SDLT liability is calculated as follows: –

    Purchase price bands (£)Percentage rate (%)SDLT due (£)
    Up to 125,00033,750
    Above 125,000 and up to 250,00056,250
    Above 250,000 and up to 925,000840,000
    Above 925,000 and up to 1,500,000130
    Above 1,500,000+150

    Total SDLT due50,000

    Now consider a position whereby a reservation agreement was entered into between the purchaser and the developer prior to construction of the property commencing. Depending on the conditions present, the SDLT liability may be calculated as follows: –

    Purchase price bands (£)Percentage rate (%)SDLT due (£)
    Up to 150,00000
    Above 150,000 and up to 250,00022,000
    Above 250,000+525,000

    Total SDLT due27,000

    That represents a saving of £23,000 compared to the position above. 

    How can we help?

    If you have either purchased, or are looking to purchase, a property with a reservation agreement in place, or perhaps you are a property developer an offer a reservation agreement to prospective purchasers, we would be happy to discuss your position in further detail to see if any SDLT savings can be achieved. 

    Get in touch with us today

    Call or email us any time or, simply fill out the contact form below and a member of our team will be in touch.

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    Please provide as much detail as possible in regards to the reason for your enquiry so our tax advisers can prepare and tailor their response to reflect your needs. We will endeavour to - respond / call you back - to discuss your enquiry and you will not be charged for this time.

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