On Friday 4 December the Daily Telegraph carried a piece warning downsizers that they will be taxed at the forthcoming “Additional Residential Property” (“ARP”) rates announced in the Autumn Statement. (See earlier blog.) It reported the Treasury as saying that the 3% ARP penalty “could be clawed back if they [i.e. the downsizers] sell the property within 18 months”. The “pay now – reclaim if you sell in less than 18 months” concept goes a long way beyond anything said in the Treasury announcements made so far. As yet we have neither a consultation document nor any indication of when one will see the light of day. One presumes the Treasury statements were made either on the ‘phone or in correspondence with the Telegraph journalists.
Assuming the Telegraph piece is correct, it appears that all buyers of residential property should budget to pay SDLT at the new ARP penalty rates if there is any possibility that they will, on completion, own another dwelling as well as the one they have just bought. The Telegraph piece suggests that, if you buy before you sell, you must find the money to pay the ARP penalty SDLT up-front. If you sell within the 18 month period, you may file a further return and claim a refund of the 3% penalty. The implication is that, if you don’t, you’ll be stuck with the ARP penalty rates.
Most people moving house still try to complete their sale and purchase on the same day. But this scenario is no longer as common as it was before the Crash. If Mr. and Mrs. Biedermann sell their “old” home before buying another, they usually move into rented accommodation, while they continue the search. Will their tenancy of the rented accommodation mean they already have a main residence for ARP purposes when they do manage to buy a new home? If so, will they only be able to claim a refund after the tenancy of their rented accommodation terminates?
Suppose Mr. and Mrs. Biedermann exchange contracts on their sale and purchase with both completions to occur on the same day. Unfortunately their buyer dies before completion and probate problems mean their sale does not complete on the agreed date and eventually falls through completely. The Biedermanns are bound by contract to complete their purchase, but they unfortunately still own their old home. Will they have the double misfortune of having to pay SDLT at the ARP rates, as well as having to find emergency – and very expensive – bridging finance to enable them to comply with their purchase contract?
Such failures are not as uncommon as one might suppose. Similar outcomes occur if the buyer becomes insolvent or of unsound mind between exchange and completion and if the “old” home is destroyed or badly damaged by, say, fire. Having to advise on possibly very substantial tax liabilities on the basis of an article in the Telegraph is something all lawyers very much prefer to avoid. Let’s hope the consultation paper will be published very soon.
Two other potentially significant issues are intimately connected with the forthcoming ARP regime. The first is multiple dwelling relief (“MDR”), which confers a relief on buyers acquiring two or more dwellings, provided the dwellings satisfy some basic conditions. Claiming MDR reduces the applicable SDLT rate, but not below 1%. Most MDR claims are made by buy-to-let investors. It makes little sense to penalise individual buy-to-let investors with one hand and offer them a tax relief with the other. One suspects that MDR will be substantially curtailed or abolished in next year’s Budget which is on 18 March 2016. However given that amendment/abolition of MDR has not been announced – yet – it may not be too optimistic to suggest that – probably – contracts exchanged before 14:00 on 18 March 2016 will be grandfathered.
The other issue is the SDLT treatment of mixed property. Currently a buyer of property that is partly residential and partly not, such as a High Street shop and upper parts, pays SDLT at the non-residential rates with a 4% top rate. The top rate of SDLT on purely residential property is 12%. Favourable treatment of buyers of expensive houses that include a non-residential element sits uncomfortably beside the new penal SDLT rates imposed on buyers of ARPs. Buyers of ARPs expecting to benefit from the mixed property regime might do very well to exchange and complete before 14:00 on 18 March 2016. Requiring buyers of mixed property to apportion the purchase price between the residential and non-residential elements and pay SDLT at the appropriate rates on each element has been done before; in relation to disadvantaged area relief, which was finally abolished in April 2013.
The Autumn Statement says ARP rates are expected to raise £3.82 billion in their first five years. It is possible that limiting MDR and eliminating the favourable treatment given to mixed property has already been factored into that figure. This enormous sum is going to come straight out of house buyers’ pockets. It is very hard to believe it will have no effect on prices and behaviour.