It pays to know the SDLT rules

Stamp duty land tax has many quirks and pitfalls. Bill Chandler starts a two-part series by answering a question on SDLT about the purchase of multiple dwellings QUESTION I am buying six apartments from the same developer in a single transaction. The apartments are different prices, but will cost £1.2m in total. Stamp duty land tax (SDLT) on £1.2m at residential rates is almost £100,000. Is there any legitimate way to reduce the SDLT payable? ANSWER Yes. Whenever purchasing more than one dwelling, multiple dwellings relief should always be considered. Furthermore, a buyer of six or more dwellings can choose to pay SDLT at commercial rates rather than residential rates. In this scenario, paying at residential rates and claiming multiple dwellings relief will reduce the tax liability to £45,000. EXPLANATION It is not uncommon for investors to buy multiple apartments in a new development, or for buy-to-let landlords to buy a portfolio of houses. The purchase of the freehold interest in a block of flats is also the acquisition of multiple dwellings. The changes made to SDLT in recent years have made the acquisition of residential property considerably more expensive. The slice system introduced in December 2014 charges 10% tax on any part of the purchase price above £925,000 and 12% above £1.5m. Most purchases of multiple dwellings will also attract the higher rates for additional residential properties that were introduced in April 2016, adding a further 3% of the entire purchase price. In the last five years, SDLT on a residential purchase for £1.2m has increased from £60,000 to potentially £99,750. However, where multiple dwellings are being purchased, there is scope to mitigate the tax burden. This includes off-plan purchases and applies whether the purchase is documented as a single transaction or as a series of separate but linked transactions. Awareness and understanding of multiple dwellings relief (MDR) is not always what it should be, perhaps because MDR was only introduced in 2011, several years after SDLT replaced stamp duty. There are several exclusions (for example, MDR cannot be claimed on the purchase of dwellings that are subject to leases originally granted for more than 21 years), but none of those seem to apply here. Demonstrating value MDR can be extremely valuable. Rather than applying residential rates of SDLT to the aggregate purchase price, MDR allows the buyer to calculate the tax on the average price per dwelling and then multiply that figure by the number of dwellings. There is a minimum charge of 1% of the purchase price, although the advent of the higher rates has rendered this redundant in most cases. Accordingly, a buyer is not prejudiced by buying multiple properties and will usually pay the same amount of tax per dwelling whether they are buying one or 100 dwellings. In this scenario, six dwellings are being purchased for £1.2m, so the average price is £200,000. The fact that some of the apartments cost more or less than the average is irrelevant. SDLT on a residential purchase at £200,000 (including the higher rates) is £7,500, so that is the amount of tax payable per dwelling, making £45,000 in total. Where the transaction involves up to five dwellings, MDR is the main consideration. But where the transaction involves six or more dwellings, there is another possibility. The SDLT legislation deems the acquisition of six or more dwellings to be a non-residential transaction, allowing tax to be paid at commercial rates. If this applies, it is the buyer’s choice whether to pay at residential rates or commercial rates. The benefit of paying SDLT at commercial rates is that the highest marginal rate is 5% rather than 12%, and it avoids the higher rates for additional residential properties. The downside is that there is no equivalent to MDR, so the commercial rates are applied to the aggregate purchase price. SDLT at commercial rates on £1.2m is £49,500, so in the present case the buyer will be better off paying at residential rates with MDR rather than paying at commercial rates. However, this will not always be the case. For example, if the average price of the six flats was £400,000, the buyer would pay £132,000 at residential rates with MDR, but only £109,500 at commercial rates. The buyer will need to assess each transaction to decide on the best approach. Something to consider A word of warning on MDR. Buyers need to beware that the SDLT position must be revisited if the number of dwellings is reduced within three years after the purchase. Unsurprisingly, there is no corresponding benefit if the number of dwellings is subsequently increased. So if, for example, the buyer converts the existing six flats into three larger flats, the SDLT calculation must be repeated as if the buyer had originally purchased three flats rather than six. That would double the average price per dwelling to £400,000 and increase the SDLT liability from £45,000 to £66,000. In that scenario, the buyer would be better served by paying £49,500 at commercial rates at the point of purchase. MDR should also be remembered in transactions where it may not so obviously apply. For example, an owner-occupier buying a new home may not immediately realise that he is in MDR territory. But if that property includes a self-contained “subsidiary” dwelling, such as a granny flat, then the buyer is technically buying multiple dwellings. Unusually, the buyer is allowed to have their cake and eat it in these circumstances.  Provided the subsidiary dwelling is within the curtilage of the primary dwelling and accounts for no more than one third of the total value of the property, the buyer is allowed to claim MDR on the purchase but still treat the property as a single dwelling for the purposes of determining whether the higher rates apply. The saving can be significant, exacerbated by the effect of using the average price per dwelling rather than their actual respective values. On a £1m purchase where higher rates do not apply, claiming MDR reduces the SDLT bill from £43,750 to £30,000. Bill Chandler is a professional support lawyer at Hill Dickinson LLP Click here to read part two of this look at SDLT, on overlap relief Photo: Michael Weber/imageBROKER/Shutterstock