Additional Residential Properties – changes afoot

In the Autumn Statement 2015 the Chancellor announced a Five Point Plan for residential properties with the aim of boosting home ownership and increasing opportunities for first time-buyers. One of these five points was a higher rate of Stamp Duty Land Tax (SDLT) for people buying additional residential properties from 1 April 2016, presumably to encourage home-ownership rather than the rental market.

Not one of the five points, but tucked away in the Statement was a change to the way Capital Gains Tax is paid on sales of residential properties.  More on that change later.

The Government announced a consultation on the proposed changes to residential properties which ended on 1 February and any changes are likely to be introduced in the Budget on 16 March 2016.

The consultation document set out how HMRC expect the higher rate to apply and, thankfully, include some measures that deal with the vagaries of the property market.

To decide whether the higher rate applies, firstly you must look at whether the person buying the property owns more than one property at the end of the day of the transaction. If not then the higher rate doesn’t apply.

If the answer is yes then they need to look at whether the property purchased is replacing a main residence.  If not then the higher rate applies to the purchase.

Then comes the complicated bit; if the property purchased is as a main residence and the additional properties already owned is not a residence, for example it is a buy-to-let, then the higher rate doesn’t apply.

If the purchase is of a main residence and the previous main residence hasn’t been sold then the additional rate will apply but a refund can be claimed if the previous residence is sold within 18 months.

This clearly throws up some difficult situations where couples buy a house together and may already own property individually, or on separation and divorce. Hopefully some of the responses to the consultation will provide pragmatic solutions to these, but we will need to see the actual legislation to find out whether problems will arise.

If the higher rate does apply then rates of SDLT will be:

* A property costing less than £40,000 does not need a return and is therefore exempt from SDLT

So a property purchased for £120,000 up to 31 March 2016 will have no SDLT charged, but after 1 April the same property will cost £3,600 in SDLT.

It would appear from the consultation document that all residential properties purchases by companies will attract the higher rate of SDLT, as will purchases by trusts where the beneficiaries already own main residences.

We will have to see the detail of the legislation when it is published but it would look like buy-to-let landlords and holiday home purchasers are likely to face higher SDLT charges for purchases after 1 April 2016.

As mentioned earlier the changes to property taxes included a bringing forward of the date that Capital Gains needs to be reported to HMRC. From April 2019 Capital Gains on disposals of residential properties will need to be declared to HMRC within 30 days of the completion date and the tax paid by this date. Clearly this won’t affect properties that qualify for Private Residence Relief, but and other sale of residential properties will need to be reported much sooner than at present.

Making sure all the information needed to calculate the Capital Gain is available early will clearly be an issue and the tax will also be payable far sooner than under the current rules.

Whether the new rules will encourage home-ownership or not remains to be seen.  It is unlikely to address the affordability issue for many first-time buyers, but it may cool the market for starter homes by putting off potential landlords.  But could this have the unintended consequence of an increase in rents as the private rental market contracts? Only time will tell.

If you think you might be affected by the new rules please contact one of our tax team to discuss.