Many buy-to-let purchasers buy off-plan, exchanging contracts long before the developer has finished building the house or flat. Sometimes construction hasn’t even started when contracts are exchanged. Completion may not happen for months or even years after exchange. Changes in the SDLT regime may occur between exchange and completion. If they do, which SDLT rule applies: the old one in force when contracts were exchanged or the new one in force at completion?
Traditionally, when SDLT increases are announced, the transitional rules have provided that buyers who exchanged contracts before the rise is announced continue to pay SDLT at the lower rate in force when they committed themselves to the acquisition; even if completion happens after the new rate has come into force. This is often called “grandfathering”.
Grandfathering could make a very big difference to a buyer’s SDLT liability in the context of “additional residential properties” (“ARPs”) such as second homes and buy-to-let properties. (See earlier blogs: “Time for second thoughts about second homes?” and “Put that light out – more from the ARP warden!“.) Last Monday (7 December) the Treasury announced that purchasers of ARPs who exchanged contracts before 26 November 2015 will be grandfathered and will avoid the additional 3% SDLT, even if they complete on or after 1 April next year.
It is obviously vital for buyers enjoying grandfathered status not to lose it unwittingly. Last Monday’s announcement said that grandfathering:
“…will not apply to certain transactions that involve the variation of the contract, assignments of rights and subsales, or which arise from the exercise of certain rights or options.”
Although the Treasury statement is silent on the point, one assumes that the disadvantageous variation, assignment or sub-sale must also occur after 25 November 2015, if it is to have the effect of extinguishing grandfathered status.
Assigning of the benefit of a purchase contract is not something a purchaser will do unwittingly. But how insignificant can a variation be and still trigger loss of grandfathering? Could it be an informal variation that not significant enough to require a formal variation agreement? This is something about which HMRC has only ever made one public statement – in its guidance on the Scots transition (on 1 April 2015) from UK wide SDLT to their own Land and Buildings Transaction Tax. This read:
“HMRC will not regard the following as excluding the transaction from a charge to SDLT under the transitional rules [i.e.in this context as denying grandfathering]:
- a variation of the completion date specified in the contract,
- a transfer to the nominee or bare trustee of the purchaser under the contract.”
One hopes that HMRC will take the same view in relation to ARPs. Clearly substantial alteration of either the price or the extent of the property will qualify as a variation, but less significant variations are a grey area in which it is debatable whether HMRC would regard the variation as sufficient to deny grandfathering or not. Entering in to a sub-sale contract (after 25 November 2015) to sell the property on to a third party will have the same disadvantageous side effect as varying or assigning the benefit of the contract. Exercising an option after 25 November will result in a non-grandfathered contract, even if the option was granted before 26 November.
The obvious way to avoid incurring the new penal ARP SDLT rates is to complete on or before Thursday 31 March 2016; but this will not always be commercially possible.
Purchasers with grandfathered contracts should also be careful they don’t “substantially perform” them without considering SDLT. Substantial performance is SDLT-speak for either taking possession of the whole (or substantially the whole) of the property or paying a substantial part of the price before legal completion. Paying rent before completion has a similar effect. If substantial performance occurs the SDLT legislation deems a transaction equivalent to the actual completion to have occurred on the day substantial performance happened. This fictional transaction carries a very real SDLT liability. Later, when legal completion really does occur, there’s another SDLT liability, but credit is given for the SDLT already paid.
Monday’s announcement said that substantial performance during the period between 26 November and 31 March will not cause loss of grandfathering, even if actual completion occurs in April or later. This applies regardless of whether the original contract was made before or after the November 25 cut-off date. One way to escape the ARP rates, in relation to a deal exchanged between 26 November and 31 March, is to substantially perform during that period too. The penalty for doing so is that SDLT on the full price will be due at that stage but at the normal non-penal rates. Happily in a normal transaction, no more SDLT will be due once legal completion actually occurs. There will, of course, be other commercial, economic and risk issues to be considered before doing that.
Of course, everything I’ve just said assumes that the detailed legislation (when it appears) matches the summary published last Monday.