Must the holiday come to an end? Stamp Duty Land Tax – residential English property

With all the many changes taking place in the communities in which we live, it is hardly surprising that variations are also taking place in the world of tax.

Current SDLT climate

There has been much in the press about attempts by the Chancellor to kick start economic activity, and one way this can be achieved is by adjusting the fiscal levers.

At its simplest, if money can be saved by potential homeowners in the form of reduced tax, then this is a potential catalyst to stimulate transactional interest. To that end, a significant reduction to the SDLT rates, which was announced by the Chancellor on 8 July 2020, has been very successful.  

But the clock is ticking, and the current reduced SDLT tax rates will only continue to apply to a purchase of an English residential property which completes by 31 March 2021.

In effect, currently, a purchaser only pays SDLT on consideration above £500,000.

The temporary rates are:

Also, we have seen substantial savings made for properties over £500,000 i.e., the SDLT holiday rates mean that the maximum saving can be as much as £15,000 per residential property for a price of over £500,000.

Other key SDLT points which are worth noting and currently apply are:

• First-time buyer relief is paused during the ‘SDLT holiday’ and the rules which had previously applied to first time buyers are replaced by the new reduced rates above. For first time buyers and those who are replacing their main residence, there is currently no SDLT on the first £500,000 of the consideration paid.

• These holiday SDLT rates also apply to the purchasers that have owned homes before.

• Buyers of second homes and companies/LLPs completing purchase of a residential property in England before the end of March 2021 currently benefit from the reduced rates until the end of March 2021, although the existing 3% higher rate of SDLT continues to apply on top of the revised ordinary rates. Just by way of a reminder, the higher rates of SDLT apply to purchases of residential property in England at a time when that individual already owns another residential property (anywhere in the world), and the property they are purchasing is not replacing their only or main residence. 

• Currently companies that purchase residential property worth over £500,000 pay a 15% flat rate of SDLT unless a relief or exemption applies, for example, where the property purchased is part of a property rental business. Therefore, if they are seeking to benefit from the reduced rates, they must first meet the very specific conditions for relief.

• The SDLT holiday rates are applicable to commercial property.

• The date of the exchange of contracts is irrelevant as the SDLT holiday rates only apply to transactions which legally complete by the 31 March 2021.

What does the future hold?

Going forward, with the SDLT holiday coming to end at the end of March 2021, it is hugely important that all the parties’ expectations are managed, and all transactional risks carefully assessed in meeting the deadline for the saving.

The government has confirmed that with effect from 1 April 2021 the reduced rates will revert to the standard rates of SDLT that were in place prior to 8 July 2020, as follows:

The new 2% surcharge on non-UK resident purchases

In addition to the Chancellor reverting to the original pre-holiday SDLT rates, the Finance Bill 2021 will include legislation introducing a 2% surcharge on non-UK resident transactions. The aim is to help control house price inflation and make housing more affordable for UK residents. This will apply to transactions with an effective date on or after 1 April 2021 (subject to transitional provisions). The 2% surcharge will also apply to British expats working and living overseas.

Furthermore, any overseas buyers who already own a home in England will pay the new 2% surcharge in addition to the existing 3% charge levied on additional property purchases. If the 2% increase is applied to the whole purchase price, for an additional property the top rate of stamp duty will be an eye-watering 17%.

In summary, overall, the SDLT holiday will likely continue to play an important role in stimulating property activity in England in Q1, as there are still savings to be made, albeit one has to act very quickly. Buyers are advised to accelerate their purchases and secure legally binding completion dates under contracts to ensure completion occurs in good time and before 31 March 2021.

Those prospective purchasers who delay and embark on the conveyancing process late will be at risk and will need to take great care to complete before the end of March 2021. This means they will need to ensure they are in a good position regarding having finance in place, the availability of a deposit, checking the position of any chain of properties involved and if they are also selling, it may be advisable to sell ahead of the purchase, to minimise the risk of a chain breaking down at the last minute.

It is also worth pointing out for those unlucky sellers who are contractually bound to complete before 31 March 2021 but fail to do so causing their purchaser to miss the SDLT holiday rate savings, they can expect to have to compensate the purchaser under the contract where a default has occurred.

As the SDLT holiday eventually comes to an end, we can expect the residential market to slow down in the spring. Perhaps it is worth a mention that a raft of property industry experts have written an open and frank letter to the Chancellor Rishi Sunak urging him to extend the SDLT holiday for another six months, and taper the end to avoid a collapse in market activity. The letter said the six-month extension would smooth out any cliff edge impact and facilitate an orderly return to regular market conditions. The letter is yet to receive a formal response.

So, as forearmed is forewarned, let us see how effective the Chancellor’s strategy is, and equally importantly, whether the pleas from the industry will prompt the government into a re-think and from where the SDLT savings counterpoint will come.

This publication is a very general summary of the SDLT regime. It should not replace legal and tax advice tailored to your specific circumstances.