Property Litigation

Time for second thoughts about second homes?

In his Speech last Wednesday, the Chancellor told us:

“… more and more homes are being bought as buy-to-lets or second homes. Many of them are cash purchases that aren’t affected by the restrictions I introduced in the Budget on mortgage interest relief; and many of them are bought by those who aren’t resident in this country. Frankly, people buying a home to let should not be squeezing out families who can’t afford a home to buy. So I am introducing new rates of Stamp Duty that will be 3 per cent higher on the purchase of additional properties like buy-to-lets and second homes…”

So, as from All Fool’s Day next year, purchasers of “additional residential properties” (“ARPs”)        “… like buy to let properties and second homes…”, will pay SDLT at the new higher rates set out in column 3 below:

Band Existing residential SDLT rates New “ARP” SDLT rates
£0/40k – £125k 0% 3%
£125k – £250k 2% 5%
£250k – £925k 5% 8%
£925k – £1.5m 10% 13%
£1.5m + 12% 15%

The new “slice of the price” rules introduced in December 2014 will apply; so for example someone buying an ARP for £350,000 will pay £18,000 in SDLT, but someone buying the same property as their only home (and not as an ARP) will pay only £7,500 in SDLT.

The ARP rates will not apply to companies or funds making significant investments in residential property. The government will consult on the policy detail, “… including on whether an exemption for corporates and funds owning more than 15 residential properties is appropriate.” The ARP rate exemption for purchases for less than £40k arises because transactions for less than £40,000 do not require SDLT returns. Altering the online SDLT return forms and programming is apparently very expensive.

Use of the phrase “…like buy-to-lets and second homes…” suggests that the class of ARPs will not be limited to just second homes and buy-to-let properties. There will be huge problems defining what is and what is not an ARP.

HMRC has suggested that the ARP rates will not apply to the replacement of a “main residence”. The consultation will, we are told, cover difficult cases; for example people buying a new home before selling the old one. If the Government is focussing on the “main residence” concept, its natural starting point will be the legislation about principal private residence relief from Capital Gains Tax.

What happens for example if a family has a home in the country where everybody lives, but the breadwinner acquires a pied-a-terre in the city where s/he stays on Monday to Thursday nights? Presumably the pied-a-terre will be an ARP. What happens if Theresa lives in accommodation provided by her employer and buys a “second home” somewhere else for use at week-ends or on holiday? Is that an ARP, even though she owns no other dwelling? What happens if Robin, who already owns a home, buys a conventional high street property comprising a shop with a flat above? Is that an ARP or a partial ARP? Will it make a difference whether Robin is an investor or a trader who intends to trade from the shop and let the flat?

What about purchases of rural estates that comprise more than one dwelling? Say the estate has a main house, a gardener’s cottage, a coach house and a couple of other cottages. Given that the purchaser obviously only intends to reside in the main house, will all the others qualify as ARPs? If so, will multiple dwelling relief still be available? The same question might be asked about farmhouses and farm buildings converted to dwellings and capable of use as short let holiday homes.

What about houses with granny flats? Will the granny flat be an ARP, if not bought by Granny herself? What if Mum and Dad, who are helping their son Jim onto the housing ladder, buy Jim’s new flat jointly with him. Will their share of the flat qualify as an ARP? If Alex buys a flat in Ealing, intending to let it while her posting to Silicon Valley lasts, but to move into it when she returns to the UK, is the flat an ARP? If she were to buy it and live in it before being posted, presumably it would not be.

There will probably be a bit of a scrum to get ARP deals done by Thursday 31st March 2016. By tradition, when SDLT rates go up, purchasers who have exchanged contracts before the cut-off date are grandfathered and get the benefit of the cheaper old rate, even if they complete after the cut-off date. But in this case purchasers have already been given four months prior notice of the tax hike, so the traditional rules may not be followed.

The small print in the Autumn Statement predicts that the new ARP rates will, on their own, raise £3.82b in tax in the first five years after their introduction. This is well over twice what diverted profits tax is expected raise over the same period, and is over 41% of the total SDLT raised last year. The Chancellor obviously expects a lot of purchasers to pay a lot of SDLT at ARP rates. The actual downside for them will of course be a lot more, given the professional time and expense that will be required to establish whether or not the inevitably complex ARP rules apply.

Will the Scots amend their Land and Building Transaction Tax legislation to include ARP rates?1 Will the Welsh include ARP rates when Land Transaction Tax is introduced there in April 2018? Perhaps more importantly will either devolved Government be happy with an SDLT rule that encourages the English to buy second homes over the border thus squeezing out local Welsh or Scottish families, to use the Chancellor’s own pithy phrase?

1Additional note 17/12/2015. Scotland’s Deputy First Minister, John Swinney, announced the Scottish Government’s 2016-17 Draft Budget on 16th December. It included an LBTT “second-homes” supplement on purchases of additional residential properties, including holiday homes and buy-to-let properties. Mr. Swinney said he was: “… taking action to avoid the likely distortions which will arise in Scotland from the new UK SDLT surcharge on the purchase of additional properties – including buy-to-let and second homes – which could make it more attractive to invest in such properties in Scotland compared to other parts of the UK.”