To maximise relief, get SDLT right

The stamp duty land tax (SDLT) regime applicable to UK residential property has seen significant changes over recent years. As a result, there are a number of key SDLT issues to be aware of for investment in UK residential property by corporate buyers. What is ‘residential property’? The SDLT legislation sets out the statutory definition of residential property for SDLT purposes as a building or part of a building that, at the date of the relevant transaction, is one of the following: used as a dwelling; suitable for use as a dwelling; or in the process of being constructed or adapted for such use. “Dwelling” also includes any land that is (or is to be) occupied or enjoyed with a dwelling as a garden or grounds (including any building or structure on the land) and any interest in or right over land that subsists for the benefit of the dwelling. For example, common areas (eg corridors, hallways) or other facilities (eg indoor pool, gym, garage, etc) in a building used as a dwelling or on land subsisting for the benefit of the dwelling would still be treated as part of the residential property. The legislation then specifies certain uses of a building to be treated as either residential property (including residential accommodation for students, other than a hall of residence) or non-residential property (including halls of residence for students in further or higher education, care homes, hospitals, prisons or hotels). When does a development site become residential property? HMRC guidance states that residential properties that are in the process of being constructed will be treated as dwellings at the point when walls begin to be constructed on the foundations, regardless of whether those walls are above or below ground level. If a building that contains a number of dwellings (for example, a block of student flats) is being constructed, all the dwellings are likely to be treated as being in the process of being constructed when this test is met. HMRC guidance suggests that this principle applies even if the ground floor is intended for non-residential use (eg where the building consists of a ground-floor shop with student flats above). Single acquisitions of six or more dwellings Where six or more separate dwellings are acquired in a single transaction, under the SDLT legislation the properties will automatically be treated as non-residential property instead of residential for SDLT purposes. It is understood that HMRC accepts that a “single transaction” for these purposes can involve more than one transfer as part of the same transaction. This deeming rule is specifically excluded where a claim for multiple dwellings relief is made. Multiple dwellings relief Multiple dwellings relief (MDR) has the stated intention of reducing barriers to investment in residential property. Broadly, where the relevant conditions are met, the relief operates by applying SDLT rates to each dwelling by reference to the mean consideration (aggregate consideration attributable to the dwellings divided by the number of dwellings). This is subject to a minimum SDLT rate of 1%. An important practical point is that the relief is not automatic and a claim for MDR has to be made in the relevant SDLT return. Without MDR, the acquisition of a portfolio of dwellings might mean that the transaction is pushed into higher rates of SDLT since the rates of SDLT are based on the total chargeable consideration. Broadly, the relief applies to a transaction if its main subject-matter is an interest in: at least two dwellings; or a single dwelling if: (a) it is one of a number of linked transactions; and (b) the main subject matter of at least one of the other transactions is an interest in at least one dwelling. The statutory rules set out above in relation to the use of the relevant building in determining whether a property is residential or non-residential apply. For example, a building used for the purposes of self-contained residential accommodation for students (other than a hall of residence) would be treated as used as a dwelling for MDR purposes, whereas, in contrast, a building used for the purposes of a care home would not. For the purposes of MDR, where student accommodation is treated as used or suitable for use as a dwelling, HMRC guidance confirms that the extent of a single dwelling will be determined on normal principles. For example, in the case of a block of flats available only to students, each of which consists of individual study bedrooms with communal kitchen and bathroom facilities, each “cluster flat” within the block will be treated as used, or suitable for use, as a single dwelling. A self-contained studio flat that includes a kitchenette and en-suite bathroom would also typically qualify as a single dwelling in its own right. However, as the type of student accommodation being developed is changing all the time, the analysis is not always straightforward. As with many other SDLT reliefs, the availability of MDR is subject to anti-avoidance rules where relief is withdrawn if, within three years after the transaction, an event occurs which, if it had occurred immediately before the sale, would have affected the purchaser’s eligibility for relief. A typical example is where the number of residential units reduces after the sale. Another important restriction is that MDR is not available on the sale of residential property subject to a lease, or leases, with a term of more than 21 years (referred to as “long leases”). This restriction is understood to have been aimed at preventing MDR applying to the sale of ground rent portfolios. However, it also prevents a claim for MDR on residential property where a long lease has been put in place by the developer in order to maximise VAT recovery on site acquisition and construction costs by granting a zero-rated long lease. The additional 3% charge On 1 April 2016, the supplemental 3% SDLT charge came into force, applying to purchases of additional residential properties (eg second homes and buy-to-let properties). For companies, the supplemental 3% SDLT charge applies to all acquisitions of residential property subject to certain conditions. Where it applies, the additional 3% charge should be included in computing MDR. The government briefly considered introducing an exemption for large-scale investment in residential property by investment funds and corporates. This was to avoid discouraging investment in the private residential sector. So far, the government has not proceeded with this exemption. The legislation does, however, exclude certain types of residential accommodation from the supplemental charge, including student accommodation and care homes. The 15% rate of SDLT The 15% rate of SDLT applies to the acquisition of certain high-value residential property (“higher threshold interests”, where the chargeable consideration exceeds £500,000) by non-natural persons, subject to certain reliefs. Arguably the most important reliefs are, broadly, where a higher threshold interest is acquired exclusively for one or more of the following purposes: a qualifying property rental business; a property development trade; and a property trade (where the residential property is held as trading stock). A higher-threshold interest cannot be included in a claim for MDR, unless relief from the 15% rate applies. For example, if a non-natural person acquires six dwellings, one of which is a higher-threshold interest, 15% SDLT will be payable on the consideration apportioned to the higher threshold interest and a claim for MDR can be made in respect of the remaining five dwellings. If relief from the 15% rate applies, then the higher-threshold interest can be included in the claim for MDR. A higher-threshold interest does, however, count as a dwelling for the purposes of the deeming rule, which applies non-residential SDLT rates to the acquisition of six or more dwellings, described above. Using the example above, the acquisition of the remaining five dwellings will be subject to non-residential SDLT rates. Welsh LTT Acquisitions of Welsh land will soon cease to be within the scope of SDLT and will instead be subject to Welsh land transaction tax (LTT), applicable to transactions with an effective date on or after 1 April 2018 (subject to transitional rules). One notable difference to SDLT is that the LTT legislation does not currently include an equivalent of the higher 15% rate for acquisitions of high-value residential property by non-natural persons. Should you claim MDR? A purchaser should carefully consider whether or not it is advantageous to claim MDR. Where there is a single transaction of six or more dwellings, the lower non-residential SDLT rates can apply in the absence of an MDR claim. Unfortunately, there is no substitute for doing the SDLT calculations for both claiming MDR and not claiming MDR, and comparing the results. Taking stock The issues above demonstrate just some of the factors that now complicate SDLT on acquiring UK residential property. Prudent investors should consider these carefully at an early stage to avoid unexpected SDLT surprises further down the line. Chris Waddington is a senior associate (tax) at Hogan Lovells