The Treasury published the long-awaited consultation paper (“Condoc”) on the forthcoming 3% SDLT surcharge on the acquisition of additional residential properties (“ARPs”) on Monday 28th December. Draft legislation will be published on 16th March 2016, nine working days before it comes into force
Companies, commercial partnerships and trustees of discretionary settlements may be forgiven for thinking that some of the changes set out in the Condoc are so significant that it would not have been out of place for the Autumn Statement to have referred to them explicitly. The 3% SDLT surcharge is, on its own, expected to raise £3.82 billion during its first five years. It’s now clearer from whose pockets this enormous sum will come.
Across the board SDLT increases for all companies
All corporate purchases of dwellings (including those by collective investment schemes) will be subject to the new 3% surcharge, unless the corporate purchasers are charities or registered social landlords (to use the Condoc’s nomenclature). This applies regardless of the trade carried on by the company and regardless of the company’s intentions. There is no mention of any reliefs for developers and others mirroring those available under the penal 15% rate regime that also applies to corporate purchasers of dwellings. Given that Autumn Statement announced extensions of the reliefs against the penal 15% rate, the Chancellor seems to have taken back with his 3% surcharge hand a sizeable chunk of what he appeared to have given away with his penal 15% rate hand.
The Condoc does not announce this complete across the board rate increase for all corporate purchasers of dwellings in so many words. It is a necessary inference from paragraphs 1.1 and 2.20. I have asked HMRC whether or not this is actually the intention and if any of the 15% rate reliefs will be replicated. The absence of a response suggests that an across the board increase without such reliefs is intentional.
Other examples of companies that may be caught out by this increase include corporate investors in ground rent reversions and house-builders. One assumes that the current house-builder PX reliefs will be available in relation to the 3% surcharge; but some PX purchases happen in circumstances that bar a claim for PX relief. House-builders need to be aware that, in those cases, their SDLT liability will rise by 3%. House builders buying dwellings back from plot buyers will also suffer the surcharge rates.
At present there is no indication whether other normal reliefs, in particular group relief, will be available or not. Group relief is available from the penal 15% rate, so it would be surprising if it were not available in relation to the 3% surcharge.
Trustees of discretionary settlements buying dwellings are in the same expensive boat as companies, although, in their case, the Condoc announces the across the board increase explicitly.
Mixed property & multiple dwelling relief
My earlier blog mentioned the possibility that the new legislation might also (A) reduce the comparatively favoured status of mixed property transactions involving both residential and non-residential property and (B) affect the availability of multiple dwelling relief (“MDR”). Happily the Condoc confirms that the mixed property rule will survive unchanged. MDR also survives but will be drastically emasculated. The “6+ rule” which provides that the non-residential SDLT rates (top rate only 4%) applies a purchase of six or more dwellings will also survive. The 3% surcharge will not apply if the 6+ rule applies.
We now know that all dwellings bought by companies will, by definition, be ARPs. MDR will be available but only by reference to the 3% surcharge rate. Suppose FlatCo Ltd buys 10 flats for £3m and claims MDR. Under the old rules, it would have paid £50,000 in SDLT. With the 3% surcharge, its SDLT bill rises to £140,000. Now it’s cheaper for FlatCo not to claim MDR, but instead to rely on the 6+ rule, because that only produces a liability of £120,000.
The Condoc admits that “large scale investors” may have a beneficial impact on housing stock and discusses two possible reliefs for them. Corporates (and, just possibly, natural persons) who either already own 15 dwellings or buy 15 of more dwellings in a single transaction may be exempt from the surcharge. The Condoc offers these two as alternatives.
SDLT treats commercial partnership purchases as purchases by all partners jointly. Where any partner already owns or has a share in a dwelling, all purchases of dwellings by the partnership will be subject to the 3% surcharge, unless the mixed property rule applies.
Where partnerships acquire property from partners or persons connected with them (and vice versa) the special partnership rules in Sch. 15 FA2003 would normally apply, imposing a deemed market value-related consideration instead of the actual one. The Condoc is silent about how the 3% surcharge regime and the special partnership rules will interact. For the moment it not stupid to assume that Sch. 15 will continue to apply to assess the amount of market value brought into charge, but that the 3% surcharge rates will apply to that amount when the property in question is an ARP, unless the mixed property rates apply instead.
Sch. 15 FA2003 treats limited liability partnerships as if they are ordinary commercial partnerships to which the Partnership Act 1890 applies; not as corporate bodies. This may mean that an LLP could claim exemption from the 3% surcharge, but only in the unlikely circumstance all its members are natural persons and none of them already owns a dwelling or a share in one.
Since almost all corporate acquisitions of dwellings will become 3% more costly on 1st April, such buyers would be well advised to try to complete before then, unless they are absolutely certain that the grandfathering rules, covered in another recent blog, will apply. The same applies to commercial partnerships, LLPs and the trustees of discretionary settlements.