Avoid paying stamp duty land tax when buying a residential property

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Simon Misiewicz

24th October 2017

If In this article we are going to try and answer the following SDLTquestions

– Do property developers pay Stamp Duty Land Tax?

– Do you pay Stamp Duty on development land?

– Is there stamp duty on self build?

– Will builders pay stamp duty?

– Is it possible to reclaim stamp duty?

– Are you able to swap houses without paying stamp duty?

– Can stamp duty be avoided?

You may be interested in our main article “buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord. Read Here for more (opens in a new tab)

In our other article, we discuss how Stamp Duty Land Tax affects property investors. In this article, we focus our time on property developers.

Do you pay Stamp Duty Land Tax?

Stamp Duty Land Tax is charged when buying property or land. Stamp Duty Land Tax is usually payable within 30 days of completion. However, Conveyance solicitors will often take the Stamp Duty Land Tax charge from the property developer at completion. This is to reduce their risk that the Stamp Duty Land Tax charge is paid to HMRC within 30 days. The conveyance solicitor will usually complete the SDLT return for you. We always suggest that property developers (builders) check the Stamp Duty Land Tax calculation. We have found on numerous occasions that clients have overpaid this tax because of human error.

Here is a run through of the Stamp Duty Land Tax charges for property developers

Residential properties – Stamp Duty Land Tax rates

Up to £125,000 Zero
Over £125,000 to £250,000 1%
Over £250,000 to £500,000 3%
Over £500,000 to £1 million 4%
Over £1 million to £2 million 5%
Over £2 million from 22 March 2012 7%
Over £2 million (purchased by certain persons, including corporate bodies) from 21 March 2012 15%

Per HMRC’s website a 3% Stamp Duty Land Tax surcharge that must be paid by property developers when buying a residential property. This means that the starting Stamp Duty Land Tax charge on a property costing more than £40,000 will be 3%. The top rate of Stamp Duty Land Tax to be paid by a property developer on a residential property is 18%.

Non-residential properties – Stamp Duty Land Tax rates

Up to £150,000 Zero
Over £150,000 to £250,000 1%
Over £250,000 to £500,000 3%
Over £500,000 4%

A property developer that buys a piece of land will pay the non-residential rates. This is despite the fact that the land was purchased with the intention of building residential properties. This is a significant saving of Stamp Duty Land Tax compared to buying and developing an existing residential property.

Converting non-residential properties into residential dwellings and associated Stamp Duty Land Tax charges

A number of our clients are now buying non-residential buildings. Examples being buying an office and converting it into a residential dwelling. Another example is converting a pub into a residential dwelling. This strategy has the benefit that the property developer pays non-residential Stamp Duty Land Tax charges and avoids paying the 3% Stamp Duty Land Tax surcharge.

There is an added benefit of converting offices into residential dwellings. That benefit being a reduction of VAT. The standard rate of VAT is 20% but a property developer can reduce this to 5%. The reduction of VAT is applied because of the government incentive to create more residential buildings. We discussed this benefit in our other article

What Stamp Duty Land Tax Avoidance Schemes exit to minimise SDLT?

Acquisition by an employer in case of relocation of employment FA03/SCH6A/PARA5

Stamp Duty Land Tax is exempt where a dwelling is purchased from an individual by his employer. This is only the case where:

  • An individual occupied the dwelling as his main residence in the two years of buying the new home
  • the purchase is made because the employee had to change residence due to a job relocation
  • the purchase price does not exceed the market value of the dwelling
  • An area of land acquired by the employer does not exceed the permitted area

Relocation of employment means a change of the individual’s place of employment due to the individual

  • becoming an employee of the employer
  • changing their duties with the employer
  • changing the place where they work for the employer

A change of residence is one arising from a relocation of employment so their residence is within a reasonable daily travelling distance of their new place of work.

The individual may need to change their place of residence because where they used to live is not within a reasonable daily travelling distance of their new place of work.

A new place of work means the place where the individual normally performs the duties of their employment.

Acquisition by property trader in case of relocation of employment FA03/SCH6A/PARA6

Where a property trader purchases a dwelling from an individual, whether they are alone or with other individuals, the purchase will be exempt from Stamp Duty Land Tax if all of the following conditions are met

  • the acquisition is made in the course of a business that acquires properties from individuals. In this case, individuals change residence because of relocation to meet the employer’s needs
  • the individual occupied the old dwelling as their main residence in the two years to the date of purchase of the new property
  • the purchase price does not exceed the market value
  • the area of land acquired by the property trader does not exceed the permitted area

The individual may need to change their place of residence because the distance between their home and work is no longer reasonable.

Relief under this section will be withdrawn if the property trader

  • spends more than the permitted amount on the property refurbishment
  • grants a lease or licence of the dwelling
  • permits any of its principals or employees, or any person connected with any of its principals or employees to occupy the dwelling
    N.B. if the property trader

    • intends to grant a lease or licence to the individual to occupy the old dwelling for no more than six months
    • grants such a lease or licence after the acquisition of the old dwelling

this relief will not be unavailable or withdrawn.

Acquisition by a house-building company from individual acquiring new dwelling FA03/SCH6A/PARA1 

Property developers that carry out property exchange will not need to pay SDLT.  Stamp Duty for developers can be avoided. Sheila is looking to sell her house and she decides to buy a new home from a property developer. They eventually are to do a part exchange on the old-for-new basis. Technically this allows property developers to swap houses without paying stamp duty.

The property developer will not need to pay SDLT on the purchase of the older property. This is provided the following conditions are met:

  • the individual
    • occupied the old dwelling as their main residence in the period of two years of  acquisition
    • acquires a new dwelling from the house-building company (property developer)
    • intends to occupy the new dwelling as their only or main residence
  • each acquisition is entered into in consideration of the other
  • the area of land acquired by the house-building company does not exceed the permitted area

The amount of chargeable consideration is the difference between the market value of the permitted area and the value of the old dwelling. The value of the old dwelling includes the building and land combined.

Download your property tax guide here, written by our property accountants

SDLT: Acquisition by property trader from an individual where the chain of transactions breaks downFA03/SCH6A/PARA4

Now let’s imagine that someone is looking to sell their house. It is not that difficult to imagine many of you may have been involved in a property purchase transaction that subsequently fails.

The seller may have already identified a property to buy and will likely to feel dissatisfaction with the whole process.

If a property developer was to hear about the broken-down transaction and continues to buy it, then there is no SDLT charge. This is provided that the below conditions are met as outlined in legislation:

  • the individual has made arrangements to sell the old dwelling and acquires another dwelling
  • the arrangements to sell the old dwelling fails
  • the acquisition of the old dwelling is made for the purposes of enabling the individual’s acquisition of the other dwelling to proceed
  • the property trader makes the acquisition in the course of a business that consists of or includes acquiring dwellings from individuals in the above circumstances
  • the individual
    •  occupied the old dwelling as their main or only residence at some time in the two years prior to the date of purchase by the property trader
    • intends to occupy the other dwelling as their only or main residence
  • the area of land acquired by the property trader does not exceed the permitted area

It is imperative that you understand the above. You will gain confidence and reassurance by working with one of our property accountants to ensure that you meet the conditions.

Stamp Duty Land Tax relief may be withdrawn if…

Relief under this section will be withdrawn if the property trader

  • spends more than the permitted amount on a refurbishment of the old dwelling
  • grants a lease or licence of the old dwelling
  • permits any of its principals or employees, or any person connected with any of its principals or employees, to occupy the old dwelling

The above means that the property must be purchased after the initial sale fell through. This may then be refurbished with minimal investment and then sold. All these transactions must be done within a Limited Company. Ideally, your property accountant will be looking after the tax returns for the limited company.

SDLT relief cannot be given on the first transaction within the company by the developer.

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SDLT: Acquisition by property trader from personal representatives FA03/SCH6A/PARA3

Legislation covers a scenario where a property developer purchases a dwelling from the personal representatives. The purchase will be exempt from Stamp Duty Land Tax if all of the following conditions are met:

  • the purchase is in the course of a business  consisting of  dwellings from personal representatives
  • the deceased individual occupied the dwelling as his main or only residence at some time in the two years ending with the date of his death and
  • the area of land acquired does not exceed the permitted area

ICTA88/S839 applies for the purpose of determining whether a company is connected with a house-building company a property trader means a

  • company
  • limited liability partnership
  • a partnership whose members are all companies that carry out the business of buying and selling properties. The relief is not available to sole traders, individuals or individuals in partnership. The property developer should complete a land transaction return to claim the relief available and the consideration paid should be shown at Box 10 of form SDLT1.

You may want to work with your property accountant to ensure that the necessary forms are completed correctly.

Stamp Duty Land Tax (SDLT) when buying a property in a limited company

SDLT may be payable on its market value, not the consideration given. A property has a market value of £200,000. The company pays consideration for £100,000. SDLT will still be payable on £200,000.

This applies, per the HMRC’s website, in either of the following situations, the:

  • a person who transfers the property is ‘connected’ with the company. The definition of a connected person covers relatives and people who’ve some involvement with the company
  • pays for the property with shares in the company (partly or wholly). This is to the person making the transfer. The person is connected to the company (but not necessarily the acquiring company)

Do you pay stamp duty on land with planning permission?

Download the Stamp Duty Land Tax calculator spreadsheet – . Click here

Stamp duty could well be payable if you buy land that already has planning permission granted. SDLT will be levied on the cost of the land and not the potential value of the built property.

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