The Treasury has still made no announcement whatever, beyond privately briefing favoured media outlets, on which granny flats will be reprieved and which will suffer the SDLT surcharge rates. But, while we wait, more and more nasties are emerging about the new SDLT surcharge legislation, as it becomes clearer just who is going to be paying the £3.8 billion that the SDLT surcharge rate is projected to raise in its first five years.
Suppose George and Mildred, who are spouses or civil partners, live in a house that George owns, their main residence. It is subject to a mortgage securing repayment of a loan to George of, currently, £300,000. Mildred still owns her former flat which is now let. George decides to give half the main residence to Mildred, who agrees to become jointly liable to pay off the loan.
At normal residential SDLT rates, Mildred would have an SDLT liability of £500, being the SDLT on £150,000, which is the price Mildred is deemed to have paid by accepting joint liability (with George) to pay off the loan. But, because of the let flat, Mildred’s acquisition of half the main residence is now transaction to which the surcharge rates apply. Mildred’s SDLT liability has gone up ten times and is now a whopping £5,000. In most cases people in Mildred’s position won’t be able to claim replacement of main residence exemption from the surcharge rates, because they haven’t disposed of a main residence within the previous three years. George’s “natural love and affection” as lawyers used to call it, has lumbered Mildred with a large tax bill.
It would make no difference if the buy-to-let flat belonged to George or to them both jointly. If Mildred didn’t take on liability to pay off the loan, there would be no “price” on which to levy SDLT and no SDLT liability.
Other unexpected victims of the surcharge rates include flat owners extending their leases. Suppose Robin and Marion, who are spouses or civil partners, own a leasehold flat and a seaside holiday home. Their flat lease has 49 years left to run, so they exercise their statutory rights to extend their lease at a premium of £50,000. Because they own their holiday home, the surcharge SDLT rates apply, not the normal SDLT rates. If they had no holiday home, there would have been no SDLT liability at all. But owning the holiday home means extending the lease of the home they already own will cost them £1,500 in SDLT. Again, they can’t claim replacement of main residence exemption. This time it’s because, although they have disposed their old lease, it wasn’t a lease of “another dwelling”. It was of the same dwelling.
We were told that the surcharge was introduced to tilt the residential property market more in favour of first time buyers. By no stretch of the imagination does either of these scenarios deprive a deserving first-time buyer of the chance to acquire a home. So one hopes that these are “errors” (to borrow the Treasury Secretary’s own word) of the sort made by the Treasury when it decided to surcharge the acquisition of homes that include granny flats; and that amendments to the Finance No. 2 Bill will take George, Mildred, Robin and Marion out of the surcharge regime and give them a right to a refund if they have been “caught” by the current legislation.