One point leaps out from consideration of the Budget documents published last Wednesday. It concerns the 3% SDLT surcharge on purchases of “additional residential properties”. Normally a purchaser replacing their main residence, by selling one and buying another, would get “replacement of main residence relief” from the surcharge element of their SDLT bill.
In most cases, anyone buying two or more dwellings in one transaction will pay SDLT at the surcharge rates on the entire price, even if one of the dwellings will be a replacement main residence. Many people would have expected that, in such a case, the price would be apportioned between the replacement main residence and the other dwelling(s) so that the surcharge rates would only apply to the other dwellings. This will not be the case.
A purchaser (“P”) buying a house with a separate granny flat will pay at surcharge rates even if P intends to use the main house as her/his main residence and has no other dwellings at close of play on the completion date. The same applies if P buys a house with, say, a cottage in the garden. The only exception to this rule will be if only one of the multiple dwellings bought in the transaction:
- is worth more than £40k (on a just and reasonable price apportionment); and
- is sold with either with vacant possession or subject to a lease with less than 21 years to run.
In this case replacement of main residence “relief” can apply to that dwelling.
One might suggest splitting the chargeable transaction for SDLT purposes so that replacement of main residence relief could apply to one of the transactions. But the linked transactions rule (s108 FA2003) will probably scotch almost all attempts to fragment transactions for the purpose of claiming replacement of main residence relief on one of a number of dwellings purchased. HMRC has yet to explain precisely how the it expects the linked transactions rule to apply to the 3% surcharge regime.
Multiple dwelling relief (MDR) will be available, but that will be calculated by reference to the surcharge rates. If P buys a house and cottage for £1m, SDLT without MDR would be £73,750, but an MDR claim would reduce the liability by £13,750, to £60,000. Under the pre-surcharge regime an MDR claim would have resulted in an SDLT bill of £30,000.
If P buys six or more dwellings in one transaction and opts to treat the transaction as a non-residential one. Non-residential SDLT is now payable on the “slice of the price” basis; at 0% of the first £150,000, 2% on the next £100,000 and at 5% on everything above £250,000.
What constitutes a separate dwelling for surcharge purposes has therefore become critically important in the context of replacement of main residence relief. The surcharge definition of “dwelling” is much the same as those used elsewhere in FA2003. The guidance published on Budget Day says:
“A self-contained part of a building will probably be a separate dwelling if the residents of that part can live independently of the residents of the rest of the building, including independent access and domestic facilities.”
The guidance also states that “furnished holiday lettings and holidays homes “including those which cannot be used all year round” are to be treated as dwellings, although there’s no statutory authority for that particular view. This is the first time HMRC has expressed an opinion on properties subject to planning conditions preventing year round occupation.
Given that the mixed property rule has survived, the new surcharge emphasises the advantage of including some non-residential property in the sale of expensive residential properties or properties that contain more than one dwelling. The surcharge rates do not apply to transactions that involve both residential and non-residential property.