“I’m a low-tax guy” – will Mr Javid’s SDLT switcheroo create a new set of problems?

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

I’m a low-tax guy

In today’s Times article, new Chancellor Sajid Javid has set his stall out as a man in favour of lower and simpler taxes.

A more cynical mind might suggest that this is not in doubt bearing in mind Mr Javid’s well publicised use of a tax avoidance scheme whilst he was working at Deutsche Bank.

Indeed, in a contribution to a Parliamentary debate, Mr Javid described wanting to hold on to “more of your own money that you earned for your hard work” as being a “basic human instinct” when describing the difference between avoidance and evasion.

Understandably, today’s pronouncements on Stamp Duty Land Tax (“SDLT”) have captured the imagination and the headlines.

SDLT changes

It is worth stating that, at the moment, SDLT is paid by the Purchaser. It is a necessary, and increasing, transaction cost for potential property purchasers. There is currently an exemption for first time buyers purchasing a property up to £300k and a reduced rate for the same buyers where the property is worth between £300-500k.

However, it seems that Mr Javid’s plan is to switch the burden of stamp duty to the vendor.

Clearly, this would mean that first time buyers would never have to pay SDLT.

The ‘problem’ would be switched to the other end of the property ladder where people were looking to downsize. For instance, an elderly couple who were downsizing from a large family home.

Example 1 – the downsizers

Couple downsize from family home (value £850k) and buy a retirement flat (£250k) would have £32,500 SDLT liability for doing so.

Of course, this assumes that there are no reliefs for such a move in any final plans and that rates remain the same.

Indeed, there might be many who would see this ‘re-distribution of wealth’ from wealthy pensioners to be a good thing.

It also suggests that Mrs May’s proposals to add a 1% levy for non residents purchasing a UK property will be kicked in to the long grass. It would be bizarre if this levy were to be passed on to a UK resident vendor.

Unintended consequences

Sure, SDLT has always distorted the property market – especially for properties valued around the various thresholds (this was slightly ameliorated by the change from the ‘slab’ system to the ‘slice’ system).

But there are clearly other potential issues with these announcements.

The first is the announcement itself will have an effect on the property market.

Example 2 – potential mover

Family with a £750k house. Looking at properties at £1.25m

Here under the current rules the couple would pay £68,750. An eye-watering amount of SDLT.

 However, under new proposals, they would pay £27,500.

 

Clearly, the £41,250 saving would, and will, make many people consider deferring a move until further information is available.

There must also be a fear that, if the vendor is having to pay the tax, then this will inflate property prices for everyone as the vendor will ‘price in’ the burden of SDLT. So the first time buyer may find they are paying more in the end as the vendor is effectively subbing them for this transaction cost.

One benefit is perhaps that this will probably finally kill off, what is left, of SDLT planning schemes. Most of these incorporate some sort of post completion transaction or structure. Clearly, this won’t be possible for the vendor and seems unlikely that a purchaser, with no skin in the game, would be complicit.

Summary

Of course, these proposals are sketchy at best.

However, it would be silly to think that the Chancellor was merely thinking out loud. The Treasury must be giving these proposals proper consideration.

SDLT is overly complex and has always distorted the property market. It remains to be seen how these proposals will remedy this.

 

If you have any queries about this article, or SDLT generally, then please get in touch.

1 Comment:

  • paul johnston / Reply

    However there are many problems. The first is that there could be a further resistance to sell if ther house has a mortage on it. Should the mortgage and the value be very simalar who is going to finance the shortfall caused by the Stamp Duty Reserve. In the same vein if a house being sold has a mortgage on it say £300k on a £700k house the stamp duty as a percentage of equity is very high. It is particularly penalising for those trying to down size.

    Finally for those who paid on purchase and again on sale could mean a very high tax on owning ones home.

    I suspect that the people that they want to sell, those whose families have left home will be even more resistant.

    One the whole this appears to be an idea to raise the stamp duty reserve that was estimated by Osborne but not collected.

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