3% Additional Rate of SDLT: an update

Since 1 April 2016 the acquisition of residential property in the UK may attract an additional 3% rate of SDLT. Please see table one showing the standard residential rates payable on the acquisition of a freehold or on the premium paid for a lease together with the higher rates. We set out below some key points to note.

• Application: the higher rates of SDLT do not apply to non-residential or mixed-use properties or where the consideration paid for a residential property is less than £40,000. The higher rates of SDLT are also not charged on acquisitions of high value dwellings which are already subject to the 15% rate of SDLT payable by ‘non-natural persons’ (e.g. a corporate purchaser). For further details please read our article ‘High-value residential property transactions: potential 15% flat rate of SDLT‘.

• Individuals: the higher rates are payable if an individual already owns another interest in residential property worth more than £40,000 (wherever situated in the world) unless the new property will be used as a main residence and replaces a previous main residence that has been sold.
• Married couples, civil partners and joint purchasers: HMRC will usually treat married couples, civil partners and joint purchasers as a single unit when applying the higher rate rules. This means that one person may have to pay the higher rates of SDLT due to their joint purchaser owning another property, even if they do not own another residential property. The rules treating married couples or civil partners as a single unit will not apply where a couple are legally separated or separated in circumstances where the separation is likely to be permanent.

• Company or collective investment scheme: notwithstanding our comments about the maximum rate of SDLT payable by a corporate entity, the additional rate is payable if a company or collective investment scheme acquires a residential property. This is regardless of whether this is a first or subsequent purchase by that vehicle.

• Trusts: if the trust is a bare trust, the beneficiary is treated as the owner of the underlying residential property and the rules apply as if the beneficiary had acquired in their own name. This is also the case if the trust is an interest in possession or life interest trust. However, if the trust is, for example, a discretionary trust, the acquisition of a residential property by the trust attracts the higher rates of SDLT whether or not the trust already holds residential property. Please note that the rules differ where properties are held on trust absolutely for minor children and this is discussed in greater detail below.

• Bare trusts and children: the usual position is that the beneficial owner under a bare trust is treated as owning the property interest. However, where the beneficiary is a minor child the child’s beneficial ownership is allocated to its parents (and, if they are not married to one another, the spouses or civil partners of those parents). This may have surprising consequences for the unwary.

• Delay following sale of previous main residence and purchase of new one: the higher rates should not apply when an individual (including one who owns more than one property) sells their main residence and acquires another. However, the new main residence must be acquired within 36 months of the disposal of the original main residence and the old main residence must have been used as a main residence at some time in that three-year period.

• Purchase of a new main residence prior to the sale of the old main residence: an individual will have to pay the higher rates if they acquire a new main residence unless they simultaneously dispose of their existing one. However, if they subsequently sell their old main residence within 36 months of the acquisition of the new main residence, the individual will be able to apply for a refund of the additional SDLT initially paid. Where the old main residence was sold on or after 29 October 2018, any claim for repayment must be made to HMRC within twelve months of the disposal (in most cases) so sellers should seek to deal with the claim promptly.

• Purchase of multiple dwellings: if an individual purchases two or more dwellings in a single transaction, the entire purchase will either be subject to the higher rates of SDLT or not. There is no mechanism to treat the properties separately. For example, if an individual acquired two flats as part of a single transaction, one to be used as a main residence and the other to be rented, the higher rates would apply to the entire consideration paid. Purchasers of houses that include ’granny annexes’ may also be caught by these rules because, depending on the facts, the annexe may be treated as a separate dwelling for SDLT purposes. Please note that in many cases a subsidiary property (such as a granny annexe) and the main house may, together, be treated as a single dwelling provided that the main property and the annexe are within the same property or grounds, and the main property (including its garden and grounds) is worth at least two thirds of the overall transaction value. This will require an analysis of the position and, potentially, a valuation. In addition, multiple dwellings relief may be available to mitigate the additional cost to a certain extent.
  
  Please note that, on 6 March 2024 the Chancellor of the Exchequer announced that multiple dwellings relief (MDR) would be abolished from 1 June 2024. Transactions that complete, or are substantially performed, prior to 1 June 2024, will still be able to benefit from MDR if the requirements are satisfied. In addition, where contracts were exchanged on or before 6 March 2024, MDR will still be available even if completion takes place on or after 1 June 2024. However, please note that these transactional rules will not apply if the contract is amended after 6 March 2024.

• Inherited property: where an individual inherits a 50% or smaller interest in a residential property (taking into account any interest held by a spouse or civil partner in the same property), the interest in that property is ignored for the purposes of the higher rates for three years from the date on which the individual becomes entitled to the interest in the inherited property.

• Large scale investors:  investors acquiring six or more residential properties as part of a single transaction can rely on provisions that allow the taxpayer to treat such purchases as non-residential and pay non-residential rates of SDLT (please see Table 2). In addition, purchasers of more than one dwelling (in a single transaction) may be able to take advantage of multiple dwellings relief to mitigate the impact of the higher rates. Taxpayers will have to consider the various options based on their actual situation when deciding which option is the most tax efficient.