Property buyers looking to take advantage of lower rates of stamp duty when buying multiple residential properties, or property with mixed residential and non-residential use, can expect a tightening of the rules following a consultation by HMRC.
Stamp Duty Land Tax (SDLT) is payable in England on residential property transactions with a tiered scale related to the purchase price. There are different rules if you’re a first-time buyer, or buying an additional home or a buy-to-let, or when resident overseas. Non-residential property transactions are subject to different rates which are presently lower than residential rates.
The consultation by HMRC has put the spotlight on how tax is calculated in two key areas:
Under the present rules, MDR can be claimed when at least two dwellings are purchased in a single transaction, or as part of a series of linked transactions between the same vendor and purchaser. This allows the rate of SDLT to be calculated based on the average value of each dwelling, calculated individually and added together, rather than on their combined value.
For example, rather than calculating stamp duty on a single transaction of three properties at a total cost of £1.5 million, the tax could be calculated on three individual properties valued at £500,000 each. This can enable significant savings as stamp duty rates are tiered according to property values.
Savings can also be made when claiming for mixed-use purchases, which are subject to SDLT at the lower non-residential rates, even where the amount of non-residential land in the purchase is a smaller proportion of the total. As HMRC highlights, mixed-property purchases can include, by way of example, a country house with some land let for grazing, fast food shops with flats above, pubs and B&Bs, and large-scale city centre developments comprising ground floor retail outlets with floors of flats above.
Because mixed-property purchases are classed as non-residential, as well as benefiting from the lower non-residential rate of SDLT, purchasers can avoid the surcharges due when an individual already owns residential property, or is currently living overseas, or the higher rates that apply to company purchases of pure residential property.
For the purposes of SDLT, there is a definition of what is meant by a ‘dwelling’ and in deciding if it qualifies, HMRC will use a number of indicators, such as whether there is a separate council tax bill and energy supply, the degree of separation and independence from any adjoining properties, as well as the facilities needed to live independently, such as a toilet, kitchen and washing facilities.
Our head of property, Robert Moseley, says: “Change is undoubtedly coming with HMRC looking to narrow the application of these special rules.”
“When stamp duty was introduced, the tax charges on residential and non-residential property were broadly similar so there was no significant tax advantage, but now there are big differences.”
He adds: “This is a complicated area and it is worth getting specialist, professional advice on the topic. Mixed-use purchases and MDR s not automatically applied and must be claimed through a land transaction return. Non-specialists may not be aware of the potential to make a claim or what constitutes a legitimate claim. HMRC may challenge claims based on these rules if there is room for interpretation which can result in having to pay additional tax and penalties.”
Some examples of non-residential usage claims rejected by HMRC are outlined in the consultation document, including:
· A room above a detached garage used as an office by the purchaser, when part of a large, detached, six-bedroom home;
· Leasing the garage of a suburban, semi-detached property to a company for storage; and
· A paddock area behind the back garden of a substantial residential property in an affluent location being used for informal grazing by a neighbour’s horse.
The Berry and Lamberts’ property team is well versed on the application of the rules and has links with specialist SDLT Accountants who can assist on complex cases to give clients confidence going forward with a claim.
Our property team are experts in residential, commercial and rural property transactions, dispute resolution and landlord/tenant matters.
We offer trusted experts and dependable advice to guide you in a friendly, clear and practical manner. We make use of on-line facilities to ensure that we are able to meet your needs in an efficient and cost effective way and for residential work the firm is accredited under the Law Society’s Conveyancing Quality Scheme.
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The contents of this article are for the purposes of general awareness only. They do no purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.