The Autumn Budget 2024 included a number of changes to SDLT that may have potential implications for housing developers who acquire dwellings for redevelopment. We consider these below and explore potential opportunities to mitigate the increased costs.
In broad terms, from 31 October 2024:
- The higher rates for additional dwellings (HRAD) increased from 3% above the standard residential rates to 5%.
- The punitive rate of SDLT has increased from flat charge of 15% to 17% (‘the punitive rate’).
Note that transitional rules allow contracts that were exchanged on or before 30 October 2024 to retain the pre-Budget rates subject to certain restrictions relating to variation, assignments and so on.
In addition, it is already scheduled that from 1 April 2025 the SDLT residential nil-rate band will reduce from £250,000 to £125,000.
The non-residential rates of SDLT are unchanged. However, the combined effect of the residential changes could create surprisingly significant SDLT liabilities for the unaware developer. These are explored below.
Scenario
Developer Ltd is a UK-resident for SDLT purposes. The company acquires neglected dwellings with large gardens in areas needing new housing stock. The existing dwelling is demolished post-completion, and the company builds small developments of up to 10 dwellings per site. Developer Ltd is currently purchasing a large 1930s property with two acres of garden land for £2,000,000. For this article, we will assume that the dwelling is worth £1,800,000 and the garden land is worth £200,000. The multitude of potential SDLT outcomes is explored (at a high level) below.
Residential SDLT rates
The punitive rate
The punitive rate applies to companies, partnerships with a corporate partner and collective investment schemes acquiring high value dwellings (currently being dwellings worth more than £500,000), subject to reliefs (discussed later). If Developer Ltd was subject to the punitive rate the outcomes would be:
- Completion on or before, or subject to a contract entered into before, 30 October 2024, applying the punitive rate at 15%: £300,000 SDLT.
- Completion subject to a contract entered into on or after 31 October 2024, applying the punitive rate at 17%: £340,000 SDLT.
The changes due to take effect from 1 April 2025 will not further impact this position.
HRAD
Various reliefs are available from the punitive rate for property traders and developers. Specific advice should be taken before a relief is claimed, however, there is a three-year post-completion clawback period, during which relief can be withdrawn. For example, if a person connected to Developer Ltd occupied the property acquired for even a single night, relief would be lost along with, potentially, any profit from the project.
However, assuming that relief is claimed and not withdrawn, Developer Ltd would be subject to the ‘ordinary’ SDLT rules for the purchase. As a company, the liability will be calculated applying the HRAD regime as follows:
- Completion on or before, or subject to a contract entered into before, 30 October 2024, applying HRAD: £211,250 SDLT.
- Completion subject to a contract entered into on or after 31 October 2024, applying HRAD: £251,250 SDLT.
- Completion or after 1 April 2025, applying HRAD: £253,750 SDLT.
The non-residential rates: mixed-use
If the two acres (or part) were used as part of a commercial business, then it might be possible to classify the transaction as “mixed-use” for SDLT purposes. This allows the non-residential rates of SDLT to be applied. However, where the transaction includes a dwelling worth more than £500,000 this is extracted and subject to the punitive rate separately. Here this would result in the following outcomes:
- Completion on or before, or subject to a contract entered into before, 30 October 2024:
– House £270,000 (at the 15% punitive rate)
– Land £1,000 (at the non-residential rates)
Total SDLT: £271,000
- Completion subject to a contract entered into on or after 31 October 2024:
– House £306,000 (at the 17% punitive rate)
– Land As above.
Total SDLT: £307,000
The changes due to take effect on 1 April 2025 will not further impact this position.
However, if relief from the punitive rate is claimed and the site is genuinely mixed-use, then the whole purchase price can be taxed at the non-residential rates of SDLT. Here, this treatment would reduce the total SDLT liability to £89,500. The savings can therefore be material, reducing Developer Ltd’s SDLT liability by £210,500 – £250,500 compared to the top punitive rates discussed above.
It is crucial to look at the facts and merits of each mixed-use case and we often ask further questions to the seller to establish whether our client has a reasonable mixed-use filing position. In our experience, it is also useful to collate as much evidence as possible, demonstrating what commercial activities took place on the land up until completion.
Please contact us if you need advice regarding a potential mixed-use claim. Not all sites will support such a claim, but the benefits often merit a review unless the land is clearly used for residential purposes.
The non-residential rates: dereliction
If the property Developer Ltd acquires is an uninhabitable derelict dwelling, the company may be able to apply the non-residential rates of SDLT (on the basis the property is no longer suitable for use as a dwelling and cannot actually be used as a dwelling).
However, the bar for a property being classified as derelict is exceptionally high “and will only apply to a small minority of buildings” applying HMRC’s guidance.
Properties that simply need renovation, such as repairing a roof or updating electrical wiring, will not qualify. Current HMRC guidance requires a property to have significant structural defects, rendering the property dangerous to work on or live in.
If the property was derelict within HMRC’s definition, the SDLT outcome for Developer Ltd would be the same as in the mixed-use scenario, and their liability would be £89,500. However, we understand HMRC frequently investigates derelict filings, so we would recommend as much evidence is obtained and retained to evidence the basis of the filing position.
Please contact us if you need advice regarding a potential derelict property. The majority of sites will not support such a claim, but the potential benefits often merit a review.
Takeaways
- Recent changes have increased the potential SDLT burden faced by developers acquiring residential property.
- We appreciate that SDLT has a significant impact on project viability. It is therefore fundamental to understand the potential pitfalls at an early stage. Assumptions should not be made about an expected SDLT treatment without professional advice.
- We recommend you consider SDLT early in your project timeline. Please contact us if you need advice.
Key Contacts
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at January 2025.