New lower SDLT residential threshold
New lower SDLT residential threshold
Back in July 2020, the residential stamp duty land tax threshold in England and Northern Ireland was increased to £500,000 to help stimulate the property market after the first wave of the Covid-19 pandemic. The increased threshold was originally due to apply from 8 July 2020 until 31 March 2021, but as the Covid-19 pandemic continued to run, the Chancellor announced at the time of the 2021 Spring Budget, that the temporary threshold would remain at £500,000 until 30 June 2021. From 1 July 2021, the threshold falls to £250,000, remaining at this level until 30 September 2021, before reverting to the usual level of £125,000 from 1 October 2021. For first time buyers, the threshold reverted to £300,000 from 1 July 2021 for properties costing £500,000 or less.
Similar initiatives were introduced in Scotland in relation to land and buildings transaction tax (LBTT) and in Wales in relation to land transaction tax (LTT). In Scotland, the LBTT threshold was increased to £250,000 from 15 July 2020 until 31 March 2021. However, there was no extension beyond 31 March 2021, and the threshold reverted to £145,000 from 1 April 2021. In Wales, the LTT was increased to £250,000 from 27 July 2020, originally until 31 March 2021. However, this was extended until 30 June 2021. The threshold reverted to £180,000 from 1 July 2021.
Missed the 30 June deadline
If you are looking to buy property in England or Northern Ireland and missed the 30 June 2021 deadline, there is still the opportunity to benefit from a reduced temporary threshold, as long as the purchase completes by 30 September 2021.
Completing by this deadline could save up to £2,500.
Investment properties
For SDLT purposes in England and Wales and for LTT purposes in Scotland, investors and second-home owners were able to benefit from the increased threshold, with the second property supplement (3% for SDLT purposes and 4% for LTT purposes) being applied to the rates as reduced. However, those buying second homes in Wales were not able to benefit.
Example
Julia is looking for a property to let out as a holiday let. She finds a property in June 2021 and her offer of £400,000 was accepted.
If she is able to complete by 30 September 2021, she will pay SDLT of £19,500 ((£250,000 @ 3%) + (£150,000 @ 8%).
However, if she misses this deadline, completing on or after 1 October 2021, she will pay SDLT of £22,000 ((£125,000 @ 3%) + (£125,000 @ 5%) + (£150,000 @ 8%)). Completing by 30 September 2021 will save her £2,500 in SDLT.
SDLT Multiple Dwellings Relief
SDLT Multiple Dwellings relief
Multiple dwellings relief’ (MDR) allows a rate to be charged at the percentage payable on the ‘average value’ price (referred to as the ‘Average Value SDLT’ (AVSDLT)) should more than one property be purchased at one time, rather than on the total consideration. MDR is only available for residential transactions.
The purpose of this relief is to simplify the calculation of SDLT when a single transaction includes the purchase of more than one dwelling. As such, rather than separately calculating the SDLT on each property acquired, SDLT is computed as follows:
- Calculate the ‘AVSDLT’ i.e. total dwellings consideration/ total number of dwellings.
- Multiply the resultant figure by the total number of dwellings.
The answer is the total SDLT liability.
NOTE 1: The SDLT must be at least equal to 1% x total dwellings consideration.
NOTE 2: the dwellings are not the main residence of the purchaser and as such the additional rate of 3% applies.
Basic example
A single transaction (post 1 October 2021) comprises the purchase of 4 ‘dwellings’ for £950,000.
- £950,000/4 = £237,500 per dwelling
Tax per dwelling =
- 3% x £125,000 = £3,750
- 5% x £112,500 = £5,625
£9,375 x 4 dwellings = £37,500
The minimum tax is 1% of the purchase price = £9,500
Tax payable without claiming MDR would be £67,250.
Definition 1: ‘Dwelling’
Legislation does not define ‘dwelling’ but is widely accepted as being a building or part of a building that accommodates all of a person’s basic domestic living needs. The definition has seen granny annexes, converted garages, pool houses, converted party barns and garden offices all qualify for the MDR relief.
The nearest the legislation gets to providing a definition is FA 2003 sch 6B para which states that a dwelling is:
‘A building or part of a building counts as a dwelling if-
- It is used or suitable for use as a single dwelling, or
- It is in the process of being used constructed or adapted for such use.’
One area where there have been several tax cases that have considered this definition centre round ‘granny flats’. HMRC has confirmed that provided the granny flat is a self-contained dwelling and the main house comprises more than two thirds of the total, then MDR can be claimed. One of the main issues is where a property has an additional dwelling that cannot be accessed independently. For example, in a recent tax case relief was refused as there was no door separating the house from its annexe; it also did not have a separate postal address, council tax or utility supply.
The relief does not apply to the transfer of a freehold reversion or head lease where a dwelling has a long lease of 21 years or more.
Definition 2 – ‘Single transaction’
MDR can be claimed where the transaction involves an interest in at least two dwellings or at least two dwellings and some other property.
Where six or more separate dwellings are the subject of a single transaction involving the transfer of a major interest in, or the grant of a lease then the SDLT rules treat those dwellings (for that transaction alone) as being non-residential property. This rule applies automatically. Therefore, depending on the figures, it might be better not to make an MDR claim. If one is made it is made on a land transaction return (due within 30 days of completion) or in an amendment to a return, the time limit for which is 12 months from the filing date.
Tenant in common v joint tenants – What is the difference and does it matter?
Under English law, there are two ways in which property can be owned jointly – as tenants in common or as joint tenants. The way in which the property is owned can have tax implications.
Tenants in common
Where a property is purchased as tenants in common, each owner owns a specified share of the property. There is no requirement that the ownership shares are equal. Each person’s share will normally reflect their contribution to the purchase price of the property. As tenants in common own a specified share of a property, they can sell their share independently. On death, their share passes to their estate to be distributed in accordance with the terms of their will.
Where property is owned jointly by unrelated persons, it is often owned as tenants in common. However, it may also be beneficial for married couples and civil partners to hold property in this way, particularly if the property is let.
Joint tenants
Where a property is owned as joint tenants, the owners together own all of the property equally. Any transfer of ownership needs to be signed by all parties, and as all parties have an equal interest in the property. Any sale proceeds are split equally. Under the survivorship rules, should one joint tenant die, the property passes automatically to the surviving tenant(s), and becomes wholly owned by them.
Tax considerations
If the property is let out, the income split for tax purposes depends on whether the joint owners are married or in a civil partnership or not. Where they are not, the income is usually split in accordance with their underlying shares, but the joint owners have the option to agree any income split among themselves.
However, where the property is owned by spouses or civil partners, each is taxed on 50% of the income, regardless of how it is owned. If this is not beneficial and the property is owned as tenants in common in unequal shares, the couple can make an election on form 17 for the income to be taxed in accordance with their actual ownership shares. These can be changed by taking advantage of the no gain/no loss capital gains tax rules to effect a more beneficial income split. However, where the property is owned as joint tenants, the only permissible income split is 50:50. Where a 50:50 split does not give the best result, consider owning the property as tenants in common.
For capital gains tax purposes, where the property is owned as joint tenants, the gain will be split equally between the joint tenants. However, any gain arising on a property owned as tenants in common will be allocated and taxed in accordance with each owner’s share. Each tenant in common can also sell their share independently of a sale of the property as a whole.
On death, where a joint tenant dies, the property automatically passes to the surviving tenant(s). However, where a property is owned as tenants in common, each owner can pass on their own share – it does not go to the other automatically. Their share forms part of their estate.
Plan ahead
When buying a property, consider the tax implications when deciding whether to own a property as joint tenants or tenants in common.
Sale of a second home or investment property – Reporting the gain and paying the tax
Unlike a gain on the sale of a main residence, which qualifies for private residence relief (as long as the associated conditions are met), any gain that arises on the sale of a second home or an investment property (such as a buy-to-let property) will be liable to capital gains tax. Since 6 April 2020, different rules apply to residential capital gains as compared to gains on other chargeable assets.
Report the gain
Residential property gains not covered by private residence relief must now be reported to HMRC within 30 days on the date of completion. To do this, it is necessary to set up a Capital Gains Tax on UK property account on the Gov.uk website and use this to report the gain. However, if the gain is reported on a self-assessment return before the end of the 30-day limit, the gain does not also need to be reported via the online service.
A penalty of £100 is charged for a failure to report the gain within 30 days.
Pay the tax
A payment on account of the tax due on the gain must also be made to HMRC within 30 days of the completion date. This is the best estimate of the capital gains that is due at that point in time. To calculate the amount due, the following should be taken into account:
- the annual exempt amount (unless already used on a previous property gain in the same tax year);
- any losses realised prior to completion (unless already utilised on a previous capital gain); and
- the likely rate of tax – this will be 18% if total taxable income and gains for the year are less than the basic rate band and 28% to the extent that they exceed this. The gain is treated as the top slice when working out which tax band it falls into.
Payment can be made online via the taxpayer’s Capital Gains Tax on UK property account. Interest is charged if the tax is not paid within the 30-day window.
The overall capital gains tax position for the tax year will depend on other disposals in the year. If other disposals are made in the year, the position is recalculated after the end of the year on the self-assessment return. Any additional tax falling payable must be paid by the normal capital gains tax due date of 31 January after the end of the tax year. If the eventual liability for the year is less than the amount paid on account in respect of property gains, a repayment of the excess will be made. A repayment may arise if, for example, a loss is made on shares following the disposal of the property.
Practical tip
When selling a second home or an investment property, remember to work out the capital gain and to report it to HMRC and pay the associated tax within 30 days of the completion date.
Selling your main residence with land – Will the SDLT return trip you up?
Most people do not expect to pay capital gains tax when they sell their only or main home, particularly if the property has been their only home for their entire time that they owned it. However, what is less well known is that the exemption places a limit on the amount of garden that falls within the main residence exemption. This may catch out those who sell their main residence and have large gardens or land.
What is allowed?
The legislation allows grounds up to the ‘permitted area’ to fall within the main residence exemption. This is set at 0.5 of a hectare (1.24 acres). However, a larger area may be allowed where, ‘having regard to the size and character of the dwelling’ this is required for the reasonable enjoyment of the property.
Case law
The case of Phillips v HMRC UKFTT 381 TC concerned the sale of the Phillips’ main residence, which had a garden of 0.94 of a hectare. As it was their main residence, the Phillips did not declare the gain to HMRC. HMRC investigated the disposal while checking SDLT returns in March 2017, having discovered that at 0.94 of a hectare, the grounds exceeded the permitted area of 0.5 of a hectare allowed by the legislation.
In considering whether the larger grounds were needed for the reasonable enjoyment of the property, recourse was made to previous decisions. These included the case of Longston v Baker 73 TC415, in which the taxpayer contended that land in excess of 0.5 of a hectare was needed to house and graze his horses. However, the judge noted that it was ‘not objectively required, i.e. necessary, to keep horses at houses in order to enjoy them as a residence’.
In the Phillips’ case, the Tribunal found in their favour, ruling that the land was required for the reasonable enjoyment of the property, which is large and in a rural area. However, as previous decisions show, it is far from a given that the Tribunal will always rule in the taxpayer’s favour when it comes to deciding whether land sold with a house falls within the main residence exemption.
Caution required
Some caution is required when selling a property that has substantial grounds, particularly if some of the land is used for equestrian purposes. The purchaser will pay SDLT, and where this is at mixed property rather than residential rates, a review of the SDLT returns may trigger an investigation.
Unused residential finance cost
Since 2017/18, the amount of income tax relief that landlords with residential properties have been able to claim on residential property finance costs (e.g. mortgage interest) has gradually been restricted such that for the year 2020/21 the restriction is now given as a tax reducer at the basic rate of tax (i.e. 20%). Loans that are wholly for commercial properties, land and property dealing or development businesses or properties used for a furnished holiday letting business are not affected.
Landlords affected by this restriction may have noticed a box on the 2020 tax return as being Box 45 – Unused residential finance costs brought forward.
Completion of this box records the amount of interest that has not been utilised in one year to be carried forward and to the finance costs figure of the following year. The tax reduction for that following year is then calculated using both the amount brought forward and the current year’s finance costs. The tax reduction applies to each property business separately such that any ‘excess’ tax reduction on an overseas property business cannot be used against a UK property business or share of partnership property business or vice versa. If the property has made a loss then no tax deduction will be given either and the unused finance cost amount for that year will be carried forward and utilised in the following year’s calculations. The tax reduction cannot be used to create a tax refund.
Calculating the amount of restriction to be applied can be complicated in some circumstances. The amount to claim is the lower of the finance costs incurred, the profits of the property business (less losses brought forward) and the taxpayer’s total taxable income (after deduction of the personal allowance but ignoring savings and dividend income). This restriction may result in an amount being disallowed, therefore the amount not used is carried forward to be utilised in any following year and recorded in box 45.
Basic Example:
Tax year 2019 – 2020
Employment before tax = £40,000
Rental income = £21,000
Other expenses = £(8,000)
Property profits = £13,000
Finance costs = £14,000 (£3,500 allowable against rental income – 25%)
Taxable income = £49,500 (£40,000 + £13,000 – £3,500)
Income Tax calculation:
£49,500 less personal allowance (£12,500) = £37,000
Tax due: (£37,000 x 20%) £7,400
Finance cost tax reduction calculated
on property profits (£9,500 x 20%) £ (900)
Final Income Tax = £5,500
The tax reduction is calculated as 20% of the lower of:
- finance costs = £14,000
- property profits = £9,500
- adjusted total income (exceeding personal allowance) = £49,500
The lowest figure is property profits, so £9,500 x 20% = £900 tax reduction. £1,000 finance costs (£10,500 – £9,500) that have not been used are shown in box 45 and carried forward being added to the finance costs for that year and then the total amount restricted accordingly.
If a landlord has brought forward amounts of restricted finance costs from earlier years and has receipts from their property business of £1,000 or less then they have the choice of either claiming expenses and using the reducer calculation in the normal way or claiming the Property Income Allowance (PIM) tax exemption. If they choose the PIM route then the restricted finance costs figure is carried forward to be used in any future years’ income tax liability calculation. Individuals can decide on a year by year basis which approach to take.
The ability to carry forward unused finance costs will be beneficial to those landlords with a temporary reduction in property income possibly because a property is vacant for a period or a short-term increase in costs (e.g. due to refurbishment).
Renovating the holiday let during lockdown
The Covid-19 pandemic has hit the hospitality and leisure industry hard. Landlords with furnished holiday lettings have been unable to let their properties for considerable periods of time as a result of national and local lockdowns.
Properties need regular maintenance and refurbishment, and while being in lockdown is not ideal, it does provide a window in which to undertake repairs and generally refresh and improve the property. Where expenses are incurred during a period for which the property is unavailable for letting, are the associated expenses deductible in computing the profits or losses of the furnished holiday business?
General rule
Expenses are deductible in computing the profits and losses for a property business as long as they are revenue in nature and are incurred wholly and exclusively for the purposes of the business. If the accounts are prepared using the cash basis, capital expenditure may also be deductible in accordance with the cash basis capital expenditure rules.
Impact of property closure
It will generally be the case that repairs and refurbishments are undertaken while the property is not let – no one wants to rent a holiday home to find they are sharing it with builders.
Where the property is kept solely for letting as furnished holiday accommodation, but is in fact closed for part of the year because there are no customers or no business, HMRC allow a deduction for all associated expenses incurred in this period as long as there is no private use. Consequently, where the furnished holiday let is closed during lockdown, a deduction should be forthcoming for expenses incurred in this period.
However, a deduction is not permitted where the property is used privately. Consequently, if the landlord is living in the property during lockdown and undertaking the work at the same time, a deduction will be denied for expenses incurred during the period of private use. The landlord may need to balance the convenience of living in the property while doing the work against the loss of associated deductions for tax purposes.
Repairs v improvement
Where significant work is undertaken, it is important to understand the distinction between repairs, which essentially maintain the property, and improvements, which enhance it. A repair will include replacing roof tiles blown off in a storm, whereas a new extension would constitute an improvement. Repairs are revenue expenses which can be deducted, whereas improvement expenditure is capital expenditure which cannot in computing profits.