In broad terms, companies buying residential property in England and Northern Ireland will pay SDLT at the higher residential rates (see Table 1 below). This is the case regardless of whether the company carries on a property rental or property development business.
What is ‘residential property’?
Residential property means, for SDLT purposes, any land and buildings used as a dwelling, suitable for use as a dwelling, or in the process of being constructed or adapted for use as a dwelling. If a property meets any one of these three separate tests it will be treated as residential property, as will any garden or grounds belonging to it (including any building or structure on such garden or grounds) and any interests or rights attaching to it. Broadly speaking, a dwelling is a building or part of a building that enjoys facilities required for day-to-day domestic existence (e.g. bathroom, kitchen and living room) and has sufficient privacy from other dwellings.
HMRC has confirmed that the purchase of a garden, separate from the related dwelling, will be subject to the residential rates of SDLT (albeit at the normal rates shown in Table 1 as no dwelling is purchased). Once the garden has been separated from the dwelling, subsequent purchases of the land should be subject to non-residential SDLT rates (Table 2) unless a dwelling has been built on the land (or where one has started to be constructed).
The classification of a building, or its grounds, for SDLT is not always clear-cut, and we can advise you in this regard if you require assistance in reaching a determination.
Which rates of SDLT apply?
As stated above, the acquisition of a dwelling by a company is subject to the higher residential rates of SDLT. However, the SDLT liability can be increased further if the 15% flat rate of SDLT and/ or the SDLT non-resident surcharge apply to the transaction.
A punitive 15% flat rate of SDLT may apply when a company purchases an individual dwelling worth more than £500,000. However, reliefs are available and we would usually expect a company acquiring a residential property for the purposes of its development trade, or for letting to unconnected third parties, to be able to benefit from these. Please see our previous article on the 15% rate. For the purposes of this note, we assume that the 15% rate does not apply.
The non-resident surcharge is an additional SDLT charge that is payable on top of the applicable residential rate of SDLT by a non-UK resident who acquires a dwelling in England or Northern Ireland. The surcharge applies, for example, to individuals and companies and includes UK companies that are deemed to be controlled by non-UK residents. Overseas trusts and partnerships are also caught by the rules. The non-resident surcharge adds 2% to the SDLT charge that would otherwise arise and could therefore result in a company, for example, having to pay SDLT at 17% when acquiring a dwelling if the 15% flat rate also applied.
Reducing the SDLT liability
The overall SDLT payable can be legitimately reduced in certain situations, for example:
- Mixed-use properties: the lower non-residential rates of SDLT in Table 2 below apply to these transactions. A property is treated as mixed-use if it comprises both residential and non-residential elements. Examples of mixed-use transactions may include a shop with a flat above or a house with farmland or commercial buildings. It will depend on the precise facts but it is worth considering what you are purchasing, and obtain evidence of non-residential use in preparation for an HMRC enquiry. Please note that we are aware that HMRC has enquired into a number of mixed-use transactions so it is important to carefully analyse the position and keep evidence to justify the approach taken. We would be more than happy to assist you in reaching a view as to whether an acquisition is mixed-use or not or, if HMRC has already raised an enquiry (in relation to mixed-use or other situations), assist you in responding to this. It is sometimes possible to reduce the SDLT liability further by claiming multiple dwellings relief when acquiring a mixed-use property that comprises at least two dwellings.
- Buying six or more residential properties in a single transaction: where six or more dwellings are purchased in a single transaction, the purchaser can choose to treat all of the properties collectively as a non-residential transaction so that the non-residential SDLT rates in Table 2 will apply. This can produce favourable results for non-resident company purchasers, as the non-resident surcharge does not apply to the non-residential rates of SDLT. HMRC has clarified that the term 'single transaction' refers to the purchase of six or more individual dwellings pursuant to a single contract; even if the acquisition of each dwelling completes at separate times. Although the non-residential rates often result in less SDLT being paid, it is still worth considering the total SDLT cost and comparing it with using multiple dwellings relief (see below). In most cases it is worth running both SDLT calculations to check which will provide the best SDLT result as the taxpayer can elect to pay SDLT on the most efficient basis.
- Multiple dwellings relief: where a company is buying more than one property as part of a single deal, arrangement or series of transactions between the same vendor and purchaser (or persons connected with them), the purchases are either treated as a single transaction or as ‘linked’ SDLT transactions. This means that SDLT will be calculated on the basis of the total consideration paid for the properties. Multiple dwellings relief reduces the amount of SDLT that would be otherwise payable, as it works by calculating the SDLT on the basis of the average price paid per dwelling, which is then multiplied by the number of dwellings (rather than calculating the SDLT on the total consideration paid). It is often obvious when a taxpayer acquires more than one dwelling, but there are situations, for example when acquiring a house with an annexe, where the position is not as clear due to the approach taken by HMRC in its guidance. We can assist you in reaching a conclusion as to whether or not it is reasonable to treat an annexe as a separate dwelling.
- Big House Limited, a UK resident company, buys a property comprising a large main house, two small cottages and a flat above the garage. Each of the four properties is a dwelling for the purposes of SDLT. The total purchase price is £1,200,000
- The SDLT payable on a purchase of £1,200,000, applying the higher residential rates, is £99,750
- If multiple dwellings relief is available, the total SDLT due is £56,000 (i.e. £1,200,000 divided by 4 and then multiplied by the SDLT higher rates = £14,000, then multiplied by 4 (the number of dwellings) = £56,000).
- Multiple dwellings relief and mixed-use transactions: where your transaction comprises both non-residential and multiple residential properties, HMRC allows you to pick the most SDLT efficient filing position. It might be that filing on a purely ‘mixed-use’ basis (with reference to the non-residential rates, as explained above) is the most SDLT efficient filing method. However, it is possible, when acquiring more than one dwelling and non-residential property to apportion the purchase price between the non-residential and residential elements and:
- apply the non-residential rates of SDLT to the non-residential consideration (with reference to the aggregate consideration); and
- apply multiple dwellings relief to the residential properties.
- The ordinary rule is that, where multiple residential properties are acquired in a single (or multiple linked) transaction(s), the higher rates of SDLT apply (subject to the subsidiary dwelling concession).
- However, HMRC’s current guidance changes this position, allowing the application of the standard residential rates to the multiple dwellings relief calculation in mixed-use transactions in certain circumstances. HMRC guidance states that the higher rates will not apply to the multiple dwellings relief calculation provided that it does not form part of a wider mixed-use transaction where the non-residential element of the transaction is either negligible or artificially contrived (if the non-residential element is negligible or artificially contrived, the higher rates will apply to the multiple dwellings relief calculation). Please note that when applying multiple dwellings relief there is a minimum 1% SDLT charge based on the consideration payable for the residential elements.
- Big House Limited, a UK resident company, buys a property comprising a large main house, two small cottages, a flat above the garage and 65 acres of arable farmland. Each of the four properties is a ‘dwelling’ for the purposes of SDLT. The total purchase price is £2,200,000 and, applying the non-residential rates of SDLT to the total consideration, the SDLT liability is £99,500.
- Of the total consideration, £1,200,000 is apportioned to the dwellings, and £1,000,000 (45.45%) is apportioned to the farmland. We can, assuming the conditions are met, therefore apply multiple dwellings relief to the consideration apportioned to the residential property to determine whether the headline SDLT liability can be mitigated.
- If multiple dwellings relief is available on this mixed-use transaction, the total SDLT due on the residential element is £20,000 (i.e. £1.2m divided by 4 and then multiplied by the standard SDLT rates = £5,000, then multiplied by 4 (the number of dwellings) = £20,000).
- You then calculate the SDLT liability for the non-residential element of the transaction with reference to the total consideration before then apportioning it to the purchase price attributable to the non-residential land. The SDLT liability arising on the total consideration (£2,200,000) at the non-residential rates is £99,500. In this Example 2, the amount of this non-residential SDLT liability attributable to the non-residential farmland land is £99,500 x 45.45% = £45,223.
- The total SDLT liability is therefore £65,223 (i.e. £20,000 plus £45,223).
- However, a further tax charge can arise if you claim multiple dwellings relief and there are changes to the number of units (such as a redevelopment), which takes place within three years of the original transaction. The amount payable will reflect the amount of SDLT that would have been payable if the reconfiguration had taken place at the time of the transaction. If, in Example 1 above, the two cottages are knocked into one within three years of the purchase, the SDLT would have to be recalculated as if there were three properties rather than four. In this case the SDLT due, applying multiple dwellings relief, would be £66,000 (i.e. £1,200,000 divided by 3 and then multiplied by the SDLT rates = £22,000, then multiplied by 3 (the number of dwellings) = £66,000).
Changing use: residential or non-residential SDLT?
Do be aware that, if you buy a residential property with a view to converting it to commercial use, for example if you convert a bungalow into a dentist surgery, you will most likely have to pay SDLT at the residential rates. If you purchase bare land or a commercial property (such as a barn) with the benefit of planning permission to build/convert into residential properties, then this will usually be treated as commercial property and the SDLT rate will be applied accordingly. If, however, construction of a dwelling or conversion to a dwelling has already begun, it will, depending on the nature of such works, be treated as residential for SDLT purposes. Sellers and buyers should be aware of the potential increase in the SDLT liability should building work start prior to a sale. Off-plan purchases of residential property will also be subject to SDLT at the residential rates.
If, however, construction of a dwelling or conversion to a dwelling has already begun, it will, depending on the nature of such works, be treated as residential for SDLT purposes.
Care is always needed as slightly different facts may alter the nature of the transaction for SDLT purposes and have a material impact on the total SDLT payable. Take advice at the earliest opportunity to avoid any nasty tax surprises.
The content of this article is for general information purposes only. For further information please contact Karl Pocock or Ben Clarke from Birketts’ Corporate Tax Team.
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 May 2021.