How it used to be
To state the basics, SDLT is a tax that is levied on the Purchaser. It is applied to the acquisition of interests in land (for example freehold and leasehold interests in property). All interests in land are subject to the duty unless they are exempt. For example, a security interest is an exempt interest in land.
Depending on the value of the property or interest, a relevant percentage of tax is levied on the Chargeable Consideration. The Chargeable Consideration is usually the consideration paid for the land. For example, if the property is acquired by an individual for £1m in cash then that is the chargeable consideration. If the property is obtained as a gift then there is no consideration.
For some types of transfer, the Chargeable Consideration might be different – for example, the assumption of a mortgage or a transfer to a connected company may both result in deemed consideration.
For some time, the top rate of SDLT was 4% – it was then raised to 5%.
This contrasts dramatically with the 0.5% duty on UK shares and nil on non-UK shares. Store this point for later!!!
What was the problem?
It seems the catalyst behind the changes was the realisation (whether real or imagined!) that whole swathes of prime residential streets in London were held by hundreds of non-UK Companies.
The holding of properties in Companies is often referred to as ‘enveloping’ a property. A property in a Company is therefore often referred to as an ‘enveloped’ property. Not a traditional technical term as such but now has made it in to the title of the Annual Tax on Enveloped Dwellings (ATED). What an absolute honour!
Once in the ‘envelope’, the shares could be bought and sold without any duty as, remember, the duty on non-UK company shares is nil. A number of more ‘mass-market’ SDLT avoidance schemes used this basic premise as well.
The solution was:
- to make enveloping the properties in the first place unattractive – the reason behind the following SDLT changes; and
- for existing envelopes, hit them with a tax – to be discussed later on in ATED blog later in this series.
The initial April 2012 changes
From 22nd April 2012, there were two changes:
- the top rate of SDLT was increased to 7 percent for all residential properties costing over £2 million – these are now superseded by the December 2014 changes.
- However, where the same property is acquired through a company (or other vehicle), then the rate of SDLT is 15 percent.
The higher rate applies in circumstances where the property is acquired by something or someone called a Non-Natural Person (NNP). Rather than being a personal slight, this specifically refers to ‘vehicles’ such as companies, collective investment schemes (including unit trusts), and partnerships in which a non-natural person is a partner.
Note that a NNP does not include Trustees even where the Trustee is a Corporate Trustee.
From 20 March 2014, the 15% rate of SDLT was revised such that it now applies on the acquisition of property interests valued at over £500,000 where the purchaser is a NNP.
As we will see with ATED later in this series, there are various reliefs and exemptions (which broadly mirror those offered under ATED) that might apply.
The result is that the 15% SDLT rate will not apply where a property is acquired, say, for the purpose of:
- a property development business,
- letting to third parties on a commercial basis, or
- a property trading business, provided that the property is not occupied by a person connected to the company (e.g. a shareholder or, in the case of a company held by a trust, the settlor or a beneficiary of the trust).
Why include these reliefs in the rules? Well, if you recall, the rules were introduced to stop people ‘enveloping’ their main residences or London Summer retreats.
The presence of reliefs for genuine commercial activity is entirely consistent with this. There are many commercial reasons why one would hold their property portfolio in or conduct their development through a Company.
Initially some of these reliefs were quite restrictive though, for once, the Government did take on board concerns of the interested parties and these have turned out to be reasonably practical and sensible.
Relief from the 15% SDLT rate will be withdrawn if at any time in the 3-year period beginning with the date of purchase the property interest is not held exclusively for one or more of the relieved purposes, or a non-qualifying person occupies.
December 2014 – overhaul of SDLT
The old SDLT rules were quite archaic. One would look at the total value of the property and apply the relevant rate of tax to the total value of the property. The bandings meant that the higher the value of the property the higher the rate.
This could have really unfair results where an extra £1 of consideration could lead one in to a higher band meaning the extra SDLT would be disproportionately high. Of course, this did not often happen in practice as the market became distorted around the various thresholds.
As a rule of thumb, properties up to around £925k pay less SDLT. Those over £925k pay more. Those properties changing hands for a price much higher will pay much much more SDLT! So beware of this property transaction cost.
These new changes apply generally to all Purchasers – so includes an Individual purchasing a property
Please note, the 15% still applies for NNP’s buying properties over £500k.
April 2016 – The 3% SDLT surcharge for Buy to Let Acquisitions
This will be covered in the next article – as it is a detailed subject in its own right.