3% Stamp Duty Land Tax Higher Rate and Multiple Dwellings Relief

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Simon Misiewicz

30th December 2020

Property Tax changes in 2021

This may sound dramatic but it is important to get a good understanding of the 2020 and 2021 property tax changes in relation to capital gains tax laws. You can then understand how to deal with the financial fallout from coronavirus.

2021 is shaping up to be a complicated tax season.

For many, this may mean missed or lost buy to let tax opportunities. Worse still it could mean that many landlords face a far larger tax bill than necessary. One of the things that often gets overlooked is how property tax laws can be used to benefit you as a taxpayer.

First-time property buyers may have some questions about the 3% Stamp Duty Land Tax and current changes that were made to it. These changes have to do with the Multiple Dwellings Relief (MDR) and how your property is used.

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Stamp Duty Land Tax: A Brief Overview

What is a Stamp Duty Land Tax (SDLT)?

An SDLT tax charge is placed when land or property is purchased. A buy to let buyer must pay if they purchase more than a specific amount of land in the United Kingdom. The tax is paid on land when:

– You purchase a leasehold property

– You Purchase a freehold property

– You transfer land or property in exchange for money. Like a mortgage or share in a house.

– You purchase the property through a shared ownership scheme

The rates of tax differ depending on the location of the property. For example, in Wales buyers must pay a land transaction tax if it was purchased after 1st April 2018. In Scotland, buyers pay a  Land and Buildings Transaction Tax.

This tax must be paid to Her Majesty’s Revenue and Customs (HMRC) within 30 days of the completed purchase. Regardless of whether or not, the property meets the thresholds for the SDLT United Kingdom requires an SDLT to be logged unless you have an exemption.

The amount of SDLT you must pay depends on thresholds. The SDLT threshold is the amount that the property must sell for before you are required to pay the SDLT. If the property you’re purchasing costs less than the threshold amount then you are not required to pay any SDLT.

The threshold differs depending on whether the property is residential or non-residential. If a property is residential then the threshold is £500,000, this is because of the SDLT holiday period that was introduced by Rishi Sunak in November 2018. This holiday period will end on 1st April 2021.

Non-residential properties have a chargeable SDLT threshold when the property value exceeds £150,000.

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SDLT: Residential vs Non-Residential Property

Understanding the type of property you are looking to buy is key to determining your potential SDLT burden. We’re going to provide you with information on how to determine the property and its SDLT tax charge.

Residential property refers to property and land used primarily for dwellings or that are suitable for dwelling like a house, or a flat. These types of properties can also encompass housing for students, holiday houses, and military personal. Please note that there is no distinct definition provided for the phrase ‘dwelling’ or ‘suitable for dwelling’.

While non-residential refers to other properties that are not used as residential dwellings. Non-residential properties are stores, offices, empty land. This may also include buildings where people may live but that primarily serve a Non-residential function. These types of properties can also include prisons, hotels, and hospitals.

Small hostels and Bed and breakfasts can also qualify as nonresidential if they are used by guests throughout the entire year. Though there is still some uncertainty around AirBnB and other non-permanent accommodations. This means that certain holiday lets qualify for a reduced SDLT charge.

There is a tax and financial benefit to owning a non-residential property over a residential property.

The History of Stamp Duty Land Taxes in the United Kingdom

Historically Stamp Duty was a tax identified on legal documents that required a stamp. In recent times this tax is less dependent on the need for a stamp but it still applies to the transfer of shares of stocks and those who are involved in partnerships.

Currently, the range of stamp duty taxes has been dramatically reduced. Now that transactions have become more technology-based making the need for stamp based taxes is far less applicable.

These taxes primarily only exist in the form of Stamp Duty Land Taxes when buying a property investment or a home.

In Scotland and Wales, the SDLT has replaced. From 1st April 2015, Scotland replaced the act with the Land and Buildings Transaction Tax (LBTT) and on 1st April 2018. Wales replaced the SDLT with the LTT or land transaction tax.

First Time Buyer Relief

There are special exemptions to SDLT rules if you or a partner is looking to purchase a residential property for the first time. These apply if the property was purchased on or after 22nd November 2017.

These exemptions does not remove the SDLT in its entirety.  You will pay no tax on the first £300,000. Any excess will be 5% on anything up to £500,000. This tax-free rate of £500,000 will only be applicable whilst the SDLT holiday period is in force (up to 1st April 2021). The SDLT tax charge will then be tax free up to £300,000 for first time home buyers and £125,000 for people that already own a property in their own name.

This option of stamp duty land tax first-time buyer relief provides you with the ability to invest in your first purchase without worrying about an unreasonable tax burden. Note that first-time buyer relief cannot be applied to any kind of land transfers. This means that the property must be purchased as a home.

Multiple Dwellings Relief: An in Depth Look

Multiple Dwellings Relief is an opportunity to reduce Stamp Duty Land Tax when buying a residential buy to let properties. In order for you to claim a discount, you need to purchase two or more properties form the same vendor. This is commonly known as a linked transaction. There is a linked transaction as a there are multiple land transactions taking place with the same buyer/seller.

HMRC defines a linked transaction  “When 2 or more property transactions involve the same buyer and seller, they count as ‘linked’ for SDLT. HMRC may count people connected to a buyer or seller as being the same buyer or seller”.

HM Revenue Customs counts transactions as linked if:

– there’s more than one transaction

– the transactions are between the same buyer and seller or between people connected with either of them

– the transactions are part of a single arrangement or scheme or part of a series of transactions

3% Stamp Duty Land Tax Higher Rates

Laws and regulations surrounding the SDLT have undergone a pretty significant change. The changes have been made to specific parts of the Stamp Duty Land Tax (SDLT) higher rate. These higher rates apply in specific situations. First, the property has to be a residential property or a portion of one that you purchased for £40,000.

Optimise_Accountants_Stamp_Duty_Land_Tax

The property must also meet the following criteria

– You own or partially own one or more identical residential properties that are worth £40,000 in any country

– You haven’t sold your previous home or place of residence.

– There is no lease on it that has more than 21 years before it expires

Note that these rules of higher rates apply if to both you and your spouse if you are married or in a civil union. Even if you’re not buying the property together.

The thresholds for the property prices depend on when the property is purchased. The SDLT higher rates between 8th July 2020 and 31 March 2021 will be as follows:

3% – £40,000 to £500,000

8% – £500,000 to £925,000,

13% – £925,000 and £1.5 million

15% – 1.5 million+

Changes to the SDLT Higher Rate

Recently the have been some changes to the SDLT for MDR and the 3% SDLT additional rate.

These changes have been put in place by the HMRC or the Her Majesty’s Revenue and Customs which collects revenue on behalf of the UK government.

The new changes which were rewritten in April 2020 state that the SDLT 3% higher rules do not apply to mixed properties. They have been rewritten to reflect that the 3% higher SDLT will not affect you if you own a property that has both residential and non-residential elements.

You can also still use Multiple dwelling relief to decrease the tax burden of the property, which has a residential element.

Removal of the 3% SDLT higher rate on mixed use properties

Let us take a look at an example to see how Stamp Duty Land Tax and in particular the 3% SDLT additional rate may be significantly reduced.

£350,000 purchase value of a property. We do not know too much as the property apart from it has a few ASTs. The solicitor may therefore assume, incorrectly, that the property is residential in nature. The Stamp Duty Land Tax is calculated by the solicitor as follows

£7,500 SDLT based rate

£10,500 3% SDLT higher rate (3% of £350,000)

£18,000 total SDLT liability when purchasing a residential property with a value of £350,000 (ignoring the Rishi Sunaks winter holiday for SDLT given that this ended in April 2021)

 

When we look further into the property we understand that the property has 5 bedsits. The property is all on one title, nevertheless, the five bedsits qualify for Multiple Dwellings Relief (MDR). Each bedsit has an individual value of £70,000. The £70,000 property value is less than £125,000 so no SDLT banded rate will apply.

We can now revise the Stamp Duty Land Tax calculation

£3,500 SDLT based rate (please note that there is a 1% minimum charge on the property value)

£10,500 3% SDLT higher rate (3% of £350,000)

£14,000 Total SDLT liability – SDLT banded rate and 3% SDLT higher rate

This is a nice £4,000 SDLT saving but there is more to come by asking much better questions of the buyer and seller.

We ask more questions only to find out that the five bedsits are on top of a commercial unit. This means that we can divide the £350,000 purchase price by its floor space as follows:

£250,000 for the five bedsits

£100,000 for the commercial unit beneath the five bedsits

£350,000 total purchase value

The £100,000 commercial valuation is below the £150,000 non-residential banded rate of Stamp Duty Land Tax. This means that no SDLT will be charged on this element.

This now leaves £250,000 to be taken into consideration for the solicitor when calculating the Stamp Duty Land Tax. Each flat will have an individual rate of £50,000

£2,500 SDLT banded rate with a minimum 1% charge for MDR

£0 3% SDLT higher rate as there is a commercial element. No need to apply the 3% SDLT additional rate to this transaction

£0 SDLT or the commercial element of the £1000,000

£2,500 total SDLT liability

As you can see the buyer could have saved £15,000 stamp duty land tax if the solicitor in question asked better questions.

 

No win, no fee SDLT rebates

We are proud to announce a brand-new service. We can reclaim overpaid stamp duty land tax. It is a no-win no-fee service.

We will not charge you a single penny if we are unable to claim back overpaid stand duty land tax.

Simply complete the form below if you believe that you have overpaid SDLT.

Enter your overpaid SDLT details here

We will get back to you as soon as possible

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