SDLT surcharge: A difficult and unfair tax

On 1 April 2016, residential rates of stamp duty land tax (SDLT) were increased by 3 per cent. The only exceptions are, first, a human buyer who owns no other dwelling but the one just bought, and second, a human buyer replacing their main home. Companies and similar organisations always pay the surcharge (unless they have to pay the 15 per cent rate). But that outline hides a mass of detail. An adequate training session on the surcharge takes at least three hours.

Here are three examples of the difficulties. Assume ‘dwelling’ means one caught by the surcharge. Most dwellings are, but there are exclusions.

Case 1

J lives and works in London, but has been sent to the Bristol office for three years. He rents accommodation, letting out his London home. He also owns a cottage in Devon. After three years his firm moves to Bristol, so J decides to sell his London home and buy one in Bristol.

J has to pay the surcharge. The first exemption cannot apply, as J owns a cottage. And from 26 November 2018 a time limit will be introduced into the second exemption: not only will the old home have to be sold no more than three years before the new one is bought, but the buyer will have to have lived there as their main home at some time during those three years – and J has been living in Bristol.

Case 2

A and B are professors at Oxford and Cambridge. When they married they decided it would be convenient to retain their homes in those cities. They own no other dwellings.

Neither of them can replace their home without paying the surcharge. This affects all married couples or civil partners who choose to live in separate homes. It does not affect couples who do not marry or become civil partners. The reason is that married couples and civil partners are treated as one person, and so when one partner buys a dwelling, we have to check whether the other would be surcharged if they were a buyer (even though they are not).

If A sold his old home and bought another, it would be his only dwelling and he would be replacing his main home. He is exempt on both counts. But if B were buying, it would be her second dwelling, and she would not be replacing her home.

Case 3

P buys a house (for £750,000) and a holiday cottage (for £250,000) from V under the same contract. P does not own any other dwellings.

We have to check whether P has an infant child, is married (or a civil partner), and if so whether his partner has an infant child – and then check that none of them has a dwelling. If they do, it will be treated as if P owns it.

Assume they do not. At the end of completion day P owns two dwellings, so P cannot claim an exemption on either. He must pay SDLT at the surcharged rate on £1m (£73,750). If both are vacant or subject only to short leases, P could claim multiple dwellings relief (MDR), paying at surcharged rates on the average price per dwelling (reducing SDLT to £60,000).

If P can arrange to complete on the house one day and the cottage the next, at the end of the first completion date P will own only the house he has just bought, so will be exempt from the surcharge. On completion of the cottage P will own two dwellings, so will be surcharged. The transfers will be linked.

We have to work out SDLT on linked transactions at different tax rates. The house will be charged at 75 per cent of £43,750, the normal residential SDLT on £1m, which comes to £32,812.50, and the cottage at 25 per cent of £73,750, the surcharged SDLT on £1m, which comes to £18,437.50. Total SDLT is reduced to £51,250.

If MDR is claimed as well, P must pay SDLT on the house at 75 per cent of the normal rate (with MDR) of £30,000, which comes to £22,500, and on the cottage at 25 per cent of the surcharged rate (with MDR) of £60,000, which will be £15,000. Total SDLT is then reduced to £37,500.

So, depending on how the deal is structured, SDLT could be £73,750, £60,000, £51,250, or £37,500.

In the absence of any real guidance from HMRC – certainly none that shows this level of sophistication – how many conveyancers would get the right answer?

Paul Clark is a consultant at Cripps

@crippslaw

www.cripps.co.uk