The changes to SDLT rates will affect bridging borrowers, who will have to budget for the increased tax costs
Last year’s Autumn Statement saw the Government announce a five-point plan for housing, with the aim of delivering low-cost homeownership for first-time buyers.
One of these points involves charging higher rates of stamp duty land tax on purchases of additional residential properties such as buy-to-lets and second homes. The higher rates will be 3 percentage points above current SDLT rates (see box) and will take effect from 1 April 2016.
The Government estimates around 90 per cent of residential property transactions in England, Wales and Northern Ireland will not pay the higher rates of SDLT. Exemption applies where, “at the end of the day of the transaction, an individual purchaser or joint purchasers only own one residential property”.
This policy design is simple enough for first-time buyers, simultaneous sales or where a previous main residence has been sold prior to forward purchase.
However, where purchasers of a new main residence have not yet sold their existing main residence, the policy is more complicated and onerous. In this scenario, the transaction would be liable for higher rates of SDLT but a refund would be available if the previous main residence was sold within 18 months.
The SDLT would have to be paid within 14 days and, should the existing property sell during this period, the Government would permit the normal rates to apply as long as the return was not delayed.
The open consultation paper published by HM Treasury on the tax increase provides considerable detail on other scenarios that may lead to either exemption, a higher charge levy or a higher charge levy with rebate potential.
The Government will adopt a two-stage test when determining whether purchase of a residential property is a replacement of a main residence. Step one is described as “at the time of the transaction, a property sold in the last 18 months was the only or main residence of the individual”. The second is described as “whether the purchaser of the new property intends to occupy that property as their only or main residence”.
Considering one of the key uses of bridging finance is to enable purchase of a new residence prior to the sale of a former residence, the changes to SDLT rates will impact bridging borrowers, who will have to budget for the increased tax costs when making a new purchase on this basis. They may need to increase the mortgage debt to enable the purchase to take place and interest rates offered may therefore increase.
I expect the impact to be small but, where borrowers are considering bridging finance, the combination of relatively high interest rates and a 3 per cent SDLT premium may be sufficient negative pressure to consider buying only once sold.
The consultation paper refers to the treatment of large-scale investors and the potential to provide SDLT higher-rate charge exemption where “certain purchases of additional properties can positively contribute to an overall increase in housing supply and support the Government’s wider housing strategy”.
The Government released its initial view during the Autumn Statement, stating that “exemption from higher rates would apply only to corporates and funds who have an existing residential property portfolio of at least 15 properties at the time of a transaction”.
Subsequently, the Government has decided it may be more beneficial to provide exemption for “significant investment” rather than offering tax advantages to large portfolio holders who may be buying only a small number of properties each year. It could be that purchases of 15-plus units will be exempt regardless of purchaser type.
Changes to SDLT pose a potential cashflow problem for buyers. They will have to either eat into savings or, if available, take higher debt to offset the increased tax charged.
Intermediaries should become familiar with the proposed changes to ensure borrowers are made aware of basic property tax matters and mortgage recommendations are appropriate.
Chris Fairfax is managing director at Positive Lending