Increased Stamp Duty Land Tax (“SDLT”) for purchases of additional residential property
In a further attempt to slow the "buy-to-let" market and second home ownership, it was announced in the Autumn Statement that a supplementary 3% SDLT will apply to the purchase of additional residential property. The increased SDLT will apply to the purchase of a second or subsequent property which is not the purchaser’s main residence. The increased SDLT will apply from 1 April 2016.
A consultation document was published on 28 December 2015 detailing the proposals for the new legislation and inviting responses by 1 February 2016. It is likely that the final details of the legislation will be announced at the Budget on 16 March 2016.
The rates of SDLT are as follows:
|Property Price (£)
Tax rate charge on
part of property price
within each tax band -
New SDLT rate on
from 1 April 2016
|0 - 125,000
|125,001 - 250,000
|250,001 - 925,000
|925,001 - 1,500,000
It is intended that the higher rates will not apply "if at the end of the day of the transaction an individual only owns one residential property, irrespective of the intended use of the property".
So, for example, if an individual lives in rented accommodation and sells the only residential property that they own, a buy-to-let, and purchases another buy-to-let, they will not be subject to the additional rates of SDLT because at the end of the day of the transaction, they only own one residential property.
If a purchaser already owns two or more properties, whether the higher rates of SDLT apply will depend on whether the purchaser is replacing their main residence. If the previous main residence has not been sold at the point of purchase of the new main residence, the higher rates of SDLT will apply. However, a refund will be available if the previous main residence is sold within 18 months. It is not proposed that there will be an ability to elect a property as the main residence for the purposes of SDLT.
Interestingly, there is no relief proposed for parents helping children onto the property ladder. So if parents are purchasing a property for their child to live in, this will be treated as a purchase of a second property and the higher rates of SDLT will apply. However, if a parent were to give their child money towards a deposit and act as guarantor on the mortgage, but not own the property jointly with them, the higher rate of SDLT will not apply as they will not own more than one residential property.
The additional duty could also affect those who own property overseas, though the consultation document is unclear. It is therefore advisable for those who own a home abroad to be cautious about buying in the UK until the detail is known.
The consultation asks for responses to the proposals that the higher rates of SDLT should not apply to corporates and funds owning more than 15 properties, and whether this should be extended to individuals in the same position.
If you are currently in the process of buying a second property consider whether it is possible to accelerate completion before 1 April 2016.
Annual Tax on Enveloped Dwellings ("ATED") extension
Following the extension to ATED announced in the 2014 Budget, the second stage of this extension will come into force from 1 April 2016 (2016/17), bringing properties valued over £500,000 within the regime. The relevant charge will be £3,500 per year and this is due, together with the annual return, in October 2016.
The ATED rates have not yet been announced for 2016/17, however, it is anticipated that they will be increased by inflation.
It is important to remember that the ATED charge is based on the value of the property on 1 April 2012, so property owners should revisit their 1 April 2012 valuation to check if their property now falls within the lower threshold for ATED. It is also important to remember that even if the property qualifies for relief from ATED (for example, it is commercially rented), an ATED return still needs to be filed to claim the relief.
Property will need to be revalued every 5 years from 1 April 2012. This date is rapidly approaching at 1 April 2017. Property owners will need to be prepared to consider obtaining valuations at this date.
Inheritance tax ("IHT") – residential property held via an offshore structure
We are still awaiting a consultation further to the announcement in the Summer Budget that UK residential property held via offshore vehicles will now be chargeable to IHT. Previously, UK residential property owned by non-UK domiciled individuals via non-UK company structures were regarded as excluded property and outside the scope of IHT.
Holding residential property via a structure may now not be the preferred route for non-UK domiciled individuals. It has been hinted that there may some form of de-enveloping relief available but no details have been released as of yet. Therefore, for the time being, review your options with your advisers.
Inheritance tax – Residence Nil Rate Band ("RNRB")
For deaths on or after 6 April 2017, the RNRB will be available as an enhancement to the existing nil rate band ("NRB") where the deceased’s residence is closely inherited (inherited by a lineal descendant such as a child or a grandchild). The extra allowance will be phased in from 2017/18 at £100,000 increasing to £175,000 by 2020/21. There will be a tapered withdrawal of the RNRB for estates valued at more than £2 million. The basic NRB will be frozen at £325,000 until 5 April 2021.
With the ability for both the basic and residence nil rate bands to be transferred to surviving spouses and civil partners, the government were able to claim that the effective IHT threshold for a couple will increase to £1 million in 2020/21. Where the first death occurs prior to 6 April 2017, the RNRB remains transferrable where the second death occurs after this date. However, a claim must be made within two years of the second spouse or civil partner’s death.
Income tax – buy-to-let – wear and tear allowance
The wear and tear allowance will be abolished from 6 April 2016 and a form of renewals basis will be introduced. This will mean that the cost of replacing furnishings (not the original outlay) in a rental property (whether let furnished or unfurnished) will be allowable as a deduction.
The new renewals basis will cover items such as moveable furniture, white goods, carpets, curtains, linen, crockery or cutlery. This is certainly preferable to the current position for landlords of unfurnished property who have not been allowed relief for replacing such items.
Those claiming the wear and tear allowance may wish to consider deferring replacing items until after 6 April 2016.
Income tax – buy-to-let – relief for finance costs
From 6 April 2017, there will be a restriction on the relief that landlords of residential property obtain for finance costs (mortgage interest, arrangement fees etc). The restriction will be phased in over four years so that by 2020/21, relief for finance costs will only be available as a basic rate reduction.
The restrictions will apply to individuals, trustees and partnerships and will not apply to furnished holiday lettings, commercial premises or corporate owners.
The impact of the changes have yet to be felt, but individuals with high mortgage costs will see an increase in their tax liability and may affect the affordability of their rental business, or result in the additional tax costs being passed on to the tenant in increased rental costs.
Landlords may therefore wish to review their mortgage arrangements or even consider incorporation if the income stream is not required. However, incorporation is not appropriate for everyone and specialist advice should be obtained.