Reducing the impact of Stamp Duty Land Tax (SDLT)

simon

Simon Misiewicz

19th January 2016

By Louise Misiewicz

Updated and relevant for the tax year 2018/19

Are you looking to buy multiple properties as an investment?

Have you worked out that you will pay a lot of SDLT?

SDLT relief: Averaging

This is a relief whereby you can take the total value of the property portfolio, if it is less than six residential properties, and buy them as an individual or put them into a limited company.

So, if you buy three properties at £100,000, then the average of each house would be £100,000. Therefore no SDLT will apply using the rates shown in my previous article.

There is one caveat. There is a minimum fee of 1% SDLT to be applied when using averaging on the entire amount.

Example: The freehold of a new block of 10 flats is purchased for £3.5 million. The transaction is a relevant transaction for the purposes of the relief as it involves the acquisition of more than one dwelling. The chargeable consideration divided by the number of dwellings is £350,000. The SDLT total charge is £18,000 (£10,500 SDLT surcharge plus £7,500 normal SDLT band charge). The fact that you have 10 properties would mean a total charge of £180,000.

Please note using the average rate there is a minimum 4% rate that needs to be applied (was just 1% but now we need to add in the 3% SDLT surcharge).  This means the average method provides us with a charge of £140,000. This therefore provides a saving of £40,000.

Please note that you will need to add on the 3% SDLT surcharge for residential properties for properties that exchanged on or after 25th November 2016 per HMRCs website.

Averaging relief will not be allowed if:

– The properties are not dwellings, as in properties that are lived in by people;
– The properties are commercial properties; or
– You transfer a freehold reversion or head lease where a dwelling has a long lease of 21 years or more.

Commercial rates 

An alternative to the above you could base the SDLT rates on non residential provided that you have purchased 6 or more properties (per HMRCs website). In the above example then SDLT rate for the total acquisition cost of £3.5m would be £164,500

Conclusion

From the above example we conclude it is better to use the average residential rates for SDLT purposes.

  • £140,000 residential average method using the flat rate of 4% of the £3.5m acquisition costs
  • £180,000 of buying 10 flats with individual rates of £18,000 (£10,500 SDLT surcharge plus £7,500 normal SDLT band charge)
  • £164,500 using the non residential rates

It is therefore imperative that you calculate the SDLT based on the three scenarios before you pay money over to HMRC.

ATED relief – rented properties

It was suggested that properties valued over £500,000 would be subject to Annual Tax on Enveloped Dwellings (ATED) when you buy a residential property into a limited company. This does not apply provided that the property is rented out. You will need to complete a form Annual Tax on Enveloped Dwellings (ATED): Relief Declaration Return  to let HMRC know that the property is rented and that ATED should not be applied.

Next steps — how to implement this strategy

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