Country houses for sale

Need to Know: Stamp Duty Land Tax

According to Pitt the Younger stamp duty was “easily raised, pressing little on any particular class … and producing a revenue safely and expeditiously collected at small expense” and all this in the year in which he doubled it. Two further changes are now looming; the introduction of the 5% rate from 6 April 2011 for property worth over £1 million and the abolition of first time buyer relief from 24 March 2012. With this in mind, I thought a brief guide would be in order.  

Cited as a cause of the American War of Independence (‘no taxation without representation’), stamp duty was originally designed to last for 4 years from 1694 to fund the war with France. It was an ad valorem tax on ‘vellum, parchment and paper’ that is, it was a tax on the actual document: it was abolished for transactions of land (though not for shares) in 2003 and its replacement, SDLT, is a tax on the value of transactions instead.

One of the problems SDLT was designed to solve was that pre-2003 there was no actual requirement to stamp documents, merely a proviso that if it had not been stamped, then it would not be registered by the Land Registry (meaning in turn that the transaction took effect in equity only, not in law); as this is not readily understandable, many decided it meant that paying Stamp Duty was optional. Now SDLT must be paid within 30 days of the effective date of the transaction (usually completion) which at least has the advantage of being unambiguous.

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Another point to note is that SDLT is charged at the rate at which it applies on the full consideration in the transaction. For example, if you buy a house for £300,000 then the whole £300,000 is taxed at 3%, similarly, buying a house for £600,000 means that the whole £600,000 is taxed at 4%. When the 5% rate is introduced the same rule will apply, meaning that after 6 April you will pay at least an extra £10,000 in SDLT. Surely an excellent incentive to get a move on with any current purchases now? Although consideration is usually just the purchase price, it is also defined to include ‘money’s worth’ (such as assumption of debt, exchange of land or agreeing to carry out works) and SDLT will be calculated on the total value.   

Leases are also subject to SDLT but the calculation of how much is due is a complicated affair, based on the premium, term and net present value i.e. rent. As a guide, a lease granted for 10 years, with no premium at a rent of £1,000 per month falls below the SDLT threshold, but the same lease granted for 20 years is liable to £455 SDLT. A 10 year lease this time granted at a rent of £2,000 per month is liable to £745 SDLT. Fortunately HMRC has some useful calculators on its website which alleviate some of the pain of working this out. It is the tenant’s responsibility to pay SDLT but this can be changed by specific provision to the contrary. Leases with rent reviews in the first five years, contingent rents or agricultural tenancies from year to year are a whole other kettle of fish – and one I strongly recommend delegating to a professional.

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Having deluged you with bad news, there are some positives: probably the best of which is that the new 5% rate only applies to wholly residential transactions, so farms, for example, will not be subject to it as they are mixed use. More generally, gifts are not subject to SDLT either, so transfers for inheritance planning are not caught by it. Finally, there are also a number of specific reliefs which might assist, such as relief for disadvantaged areas (there is a postcode search on the HMRC website), sub-sales and gift and leaseback type arrangements. Again, seek professional advice to make sure you take advantage of these where possible.

Human nature being what it is, a number of schemes have been tried to ‘mitigate’ the SDLT payable. One client (who was very pleased with his ingenuity) suggested that he might buy half the property and his wife the other half, the price of each half falling under the 0% limit and therefore avoiding paying any SDLT. I was sorry to disappoint him. Transactions which are in any way ‘linked’ are simply taxed on the total value. Lowering SDLT, or squeezing property into lower bands by attributing part of the purchase price to fixtures and fittings is another common tactic. However, as HMRC are inherently suspicious of such schemes they will need to stand up to very close scrutiny, especially where it puts the property in a lower tax band. That said, if you have a genuine case (and I have seen them), it may assist you. The bottom line is this; if a transaction looks contrived, it will attract HMRC’s attention and that is best avoided.

Still, look on the bright side; I would wager that any number of houses currently on the market at around the £1.1million will suddenly become somewhat more affordable come April. Though what I can say to cheer the sellers, I am less certain.

About Elizabeth

Despite being one who feels the cold,

Elizabeth braved a move to Northumberland and has worked there as a

solicitor with the firm of Dickinson Dees

LLP, in the Agriculture, Farms and Estates Team, where she started life

as a trainee in 2003. As part of this specialist and nationally

renowned team, she works both for a number of larger estates and trusts

on an ongoing basis and also on one-off matters, covering the range of

rural property law, including; sales and purchases, sporting

rights,rights of way, easements and tenancies, to name a few. Outside

the office, she nearly managed to get sent to the North Pole, loves the

occasional hunt with the CVNNH and continues to try and break the 4-hour

mark for a marathon. She lives with her husband, a terrier and a very

silly basset.

She can be contacted through Dickinson Dees on 0191 279 9000