In the Spending Review and Autumn Statement of 2015, the Chancellor announced a 5-point plan for housing. This Article is intended to illustrate how the changes will work in practice, as well as identifying some areas where the effects of the tax increase might be mitigated.
The Government’s stated intention was to refocus support for housing towards low-cost home ownership, particularly for first time buyers. The 5-point plan proposed higher rates of Stamp Duty Land Tax on purchases of additional residential properties. The higher rates proposed, and then introduced in the budget, are 3 percentage points above the current SDLT rates for the purchase of second homes, holiday homes, buy-to-let properties and any residence other than a place for the buyer to live in.
The promotion of owner-occupation is gained, therefore, by penalising people who buy property that they are not going to live in. Stamp Duty is an easily collected tax and increasing rates, by and large, means increasing revenue.
The Government had suggested, in the Autumn Statement, that it did not wish to put off “large scale” investors, meaning companies with a largish portfolio of homes for rent. The suggested number of ownership of residential units above which the owner would qualify as a large scale investor was 15. The Government Statement recognised that such organisations “contribute to an overall increase in housing supply”. It therefore came as a considerable surprise in the budget that the Chancellor decided that the 3% surcharge on SDLT rates would apply to the purchase of any residential property in England and Wales by companies, as well as the purchase of second homes by individuals.
A couple of examples might illustrate just how expensive, from the Stamp Duty point of view, the acquisition of residential investment properties or second homes is likely to prove: –
A property company buys a flat as an investment for £250,000. If the acquisition was completed prior to 31st March 2016, the duty payable would have been £2,500. If completed after 1st April 2016, the duty payable is £10,000 (unless Contracts were exchanged prior to 25th November 2015).
A house with planning permission for conversion to a number of flats is on the market for £750,000. The marginal rate of tax payable by a property investor acquiring that property for conversion will be 8%. The Stamp Duty payable will be £50,000.
There are also changes designed to prevent people who already own or have an interest in a residence in England and Wales from purchasing another one and avoiding the duty increase. For instance, if either one of a married couple of civil partnership acquires a residential property where the other already owns a residential property, they may pay the higher rates when purchasing another residential property. Beware, therefore, the MP whose spouse alone owns a home in the constituency and who then seeks to acquire in his/her own name a flat in London.
It will also apply to individuals who set up a limited company to purchase, say, a holiday home or a residential flat as an investment. The company will pay the SDLT surcharge.
There are other tax changes, falling outside of the Stamp Duty Land Tax regime, but which nevertheless cause more headaches for the “Buy to Let” industry. These are, in brief, an inability to set off all interest paid on borrowings against rental income for tax purposes, with the percentage of qualifying interest being reduced even further in future; and an inability to claim relatively higher rates of depreciation on furniture, fixtures and fittings.
So far, all bad news for what might be described as the residential property investment industry and all good news for the treasury. However, that industry is large and powerful and is likely to seek ways to do what it can to mitigate the impact of the tax increases. There are almost certainly going to be “grey areas” around the changes before they bed in fully.
There are some instances where the duty increase will not apply. Firstly, residential property acquired for less than £40,000 is still free from duty as there is no obligation to submit an SDLT return on an acquisition at that price. So the builder who buys dilapidated homes to do up and let out or sell, can still avoid the increase (albeit the property will have to be in pretty bad nick).
People who, or whose spouse or civil partner, do not already own a home in England and Wales, who buy a home whether to live in or as an investment, are not affected by the Stamp Duty changes.
Housing Associations and Charities who buy residential property can also claim relief. The Government still refers to them in the Autumn budget statement as “registered social landlords” whereas they are now strictly Registered Providers, but never mind. In the example above of the large house being sold for £750,000 with planning permission for conversion to flats, the commercial developer pays stamp duty of £50,000 and the Housing Association nil.
There are also Stamp Duty reliefs for the purchasers of multiple dwellings. An investment company buying a dilapidated block of 6 flats for refurbishment for, say, £600,000 qualifies for relief. The average price for those flats is taken to calculate the duty rate, subject to a minimum of 1%, so the duty in that case, was, until 31st March, 1% of the total price, or £6,000. The new rules will make that 3% of the total price (or of the average price of each flat multiplied by 6) being £18,000. However, the buyer can elect to pay tax at the rate applicable to commercial property for the purchase of 6 or more dwellings. That is generally at a lower rate, and in this case would be £7,500. So the buyer in that case would be best advised to opt to pay SDLT at the commercial rate, rather than the residential rate, and thus achieve a legitimate Stamp Duty saving.
There is a relief where a property is residential in character when acquired but is acquired specifically for the purpose of converting it to a commercial use. It may be anticipated that the disparity between commercial residential rates will lead to attempts to elect to treat property as commercial rather than residential in character.
Trusts and loans may also come to the fore. For instance, under the new rules if a parent who owns residential property acquires property jointly with their children in order to help them on to the property ladder, then notwithstanding that the child is going to live in the house, the Stamp Duty surcharge is payable. Better, from the Stamp Duty perspective to provide a loan and, with any prior mortgagee’s consent, take a charge over the property to secure that loan.
Say elderly parents live in rented accommodation or do not own residential property in England and Wales. Say the family wish to acquire a holiday home – best to acquire in the name of the parents who will not have to pay the SDLT surcharge. It may be that subsequently the parents can enter into a Deed of Trust whereby they hold the property on trust themselves as well as other named beneficiaries, or issue a charge over the property to secure any loans made by other family members.
It remains to be seen whether the Government’s stated objective of freeing up property for first time buyers, in particular, is going to be successful. It is conceivable that one of the by-products of the policy will be to reduce the price of residential property generally because of the larger amount of tax on acquisition that many people will have to pay. It may make some investors drop out of the market.
It may well be that prices, particularly in London, remain too high for first time buyers. It may have an effect on regeneration schemes, both big and small: for instance, the purchase by a builder of a terraced house for refurbishment and letting at a price of £100,000 now carries with it an additional cost for the acquirer of £3,000. The gap in the market that this may cause might not be filled by Registered Providers or charities, nor by first time buyers who will not be able to afford both a deposit and the cost of refurbishment. It is conceivable that instead of making more people the owners of the homes they live in, there will be more homes lying empty.
In summary, these are significant changes, implemented with political and economic objectives to rebalance the housing market. Expect more to follow. Although their commercial impact remains to be seen, in legal terms, the wide scope of changes and their far-reaching impact seem likely to provide more work for specialist barristers over the next few years.
David Percival is a commercial property solicitor and specialist in real estate and construction.