“This blessed plot…” – The SDLT advantages of buying vacant land
Given that he was praising England, John of Gaunt’s famous panegyric had a rather larger scope than a humble building plot. However, from an SDLT perspective, buying a plot and then engaging someone to build a house on it afterwards may confer a number of SDLT blessings, even if the seller is doing the construction works.
For example, Bob owns a vacant building plot. Pat wishes to buy it, but wants Bob to build her a house on it. Bob offers Pat a choice; either (A) buy it for £750,000 after practical completion of the house or (B) buy the vacant plot up-front for £250,000 and pay Bob to build the house afterwards by installments totalling £500,000. Option A results in Pat having an SDLT liability of £50,000, if the surcharge (HRAD) rates apply to her (because she already owns another dwelling) or £27,500, if the normal residential rates apply. Pat’s SDLT liability under Option B could be as little as £2,000 and definitely won’t be more than £2,500.
The maximum savings are available if no building work has started by the time of the transfer to Pat. If building work has started before the transfer, Pat can still save SDLT on the value of the works done after the transfer happens, but will pay SDLT on the land price plus the value of the works done before the transfer. From Pat’s point of view, the thing to avoid is what HMRC’s guidance calls “interlocking”. Interlocking would happen, for example, if Bob defaults on the building contract, and the two contracts entitle Pat to unravel the land transaction, force Bob to take the property back and get all her money back.
Let’s suppose that Bob agrees to a sale/build contract with legal completion halfway through construction. Pat can cancel the contract if that stage is not reached within nine months after exchange. Bob can cancel the contract if Pat fails to complete within 10 days after being given notice to complete. Are those contracts “interlocked”? No, they’re not.
There are other advantages to this arrangement that might interest Pat.
If Pat buys a plot on which construction has not yet started, she’s not buying a dwelling. She’s buying a building plot. So the surcharge (HRAD) rates don’t apply, regardless of how many other houses (including second homes) that she owns and regardless of whether or not she intends to use the eventual house as her only or main residence.
Suppose Pat controls a company (“PCo”) and PCo buys the plot from Bob. PCo might be liable to the penal 15% rate (applicable only to companies) if it bought the completed dwelling. A 15% rate liability would be a whopping £112,500. If PCo buys the vacant plot, it isn’t a dwelling at that stage. Neither the penal 15% rate nor the surcharge (HRAD) rates apply. PCo’s SDLT bill will be either £2,500 or £2,000.
The fact that a planning permission for construction of a dwelling has been granted does not, on its own, turn the site into residential land for SDLT purposes. If Bob’s plot was last used as for agriculture or commercial purposes, it won’t become residential land until he starts construction work on the dwelling. So if Pat or PCo takes a transfer before construction starts, the vacant plot may be either residential or non-residential depending on what is the current or most recent past use was. The disparity between the top non-residential SDLT rate (5%) and the top residential SDLT rate (12%) could make quite a difference. However in the Bob/Pat example the difference is only £500.
In the real world the requirements of funders will often prevent people from taking advantage of these SDLT savings. Moreover there are, of course, significant non-tax-related risks involved in choosing the “buy first – build later” option. Perhaps the most important are: what happens if the builder fails to finish the works on time or at all or does them badly? These risks are much less if a buyer can wait and see the finished product before paying the bulk of the price.