PROPERTY LAW UPDATE MARCH 2018

Transcription

1 12-14 The Crescent Taunton TA1 4EB Tel: PROPERTY LAW UPDATE MARCH 2018 Property Update Speaker: Richard Snape 23 rd March CPD Points DAVITT JONES BOULD

2 ABOUT DJB Established in 1999, Davitt Jones Bould is now the largest national real estate law firm in the UK. DJB s clients receive a fabulous service benefiting from their own dedicated Account Manager to ensure that the service they receive is on time, on price and totally meets their needs. DJB is entirely focused on real estate. Covering commercial property, planning and other related areas we have one of the most experienced teams of solicitors in the country with a total of over 800 years PQE. DJB does not use paralegals to undertake legal work. We act for a diverse range of clients in the real estate sector spanning many industries and our client base includes some of the most significant landowners and occupiers in the country. Handling any size of property transaction or planning project, the team is comprised of City trained and highly regarded lawyers that operate from the firm s offices in London, Manchester, Birmingham and Taunton. The firm enjoys top tier rankings in all of the main directories and is a winner of the Lawyer Awards. OUR CREDENTIALS LEGAL 500 London: Real Estate: Commercial Property, Property Litigation and Planning North West: Commercial Property South West: Real Estate: Commercial Property, Planning, Property Litigation, Local Government CHAMBERS UK London: Real Estate South West: Real Estate, Planning, Property Litigation INDUSTRY AWARDS 2016 Amercian Lawyer Legal Awards - Global Finance Deal of the Year Honoree 2013 Lawyer Awards Boutique Firm National Winner 2013 Lawyer Awards Real Estate Team 2 nd Calm, professional and very friendly a pleasure to work with LEGAL I rate everyone we have dealt with as being first class CHAMBERS 2016 Very professional, quick to respond and good at keeping the client informed. LEGAL Clients feel protected to the greatest extent. CHAMBERS 2016

3 Contents THE DIGITAL ECONOMY ACT GROUND RENT ISSUES...3 ESTATES RENT CHARGES STAMP DUTY LAND TAX AND ADDITIONAL DWELLINGS LAND TRANSACTION TAX & ANTI-AVOIDANCE OF DEVOLVED TAXES (WALES) ACT FIRST TIME BUYER RELIEF FRAUD THREATS FOR PROPERTY TRANSACTIONS SEPTIC TANKS S1 LANDLORD AND TENANT ACT

4 THE DIGITAL ECONOMY ACT 2017 The Government explanatory notes states that this intends to achieve the following: reform the Electronic Communications Code, to deliver better coverage in rural areas through greater investment and faster rollout of mobile and broadband infrastructure make it easier for communications providers to have access to land - moving to a no scheme valuation system more akin the regime enjoyed by utility providers protect landowners by strengthening the access principle and requiring communication providers to pass a public interest test clarify roles and responsibilities for all parties that use the Code, helping commercial agreements to be reached more easily and disputes to be resolved more quickly make it easier for digital communications companies to upgrade and share their equipment and get faster access to maintain sites work with industry and Ofcom to develop a Code of Practice to ensure effective implementation of new rights. powers for Ofcom to use new technologies to better manage spectrum and make it easier for different users to share spectrum make it easier to install broadband cabinets, overhead lines and poles in all areas except Sites of Special Scientific Interest (SSSIs) by making regulations introduced in 2013 for a period of five years to be made permanent. The provisions will not be retrospective. The new code states that the Landlord & Tenant Act 1954 will not apply and that there can be no contracting out. A land owner may be able to obtain possession on persistent rent arrears or other significant breaches by the operator. They may also serve at least 18 months notice, terminating no earlier than the end of the fixed term, that they intend to develop the site and that they cannot do so without possession. Any equipment which comes within the code will give rise to an overriding interest which will bind purchasers of the land. This will include under ground equipment. 1

5 It is not retrospective. The code makes clear that the Landlord and Tenant Act 1954 will not apply to the relevant equipment. Terminating no earlier than the end of the agreement, the land owner may serve at least 18 months notice to leave. If this is counter noticed then the land owner must apply to courts and show that there has either been persistent rent arrears, breach of other terms of the agreements, or that they have no intention to demolish and reconstruct the site. Any equipment within the code will give rise to an overriding interest which will bind purchasers, regardless of registration at HMLR. This will include underground equipment. The provisions came into force on 28 th December

6 GROUND RENT ISSUES Arnold v Britton [2015] UKSC 36 here 99 year leases of holiday chalets required a service charge to be paid based on the work which was done on the premises plus a yearly sum of 90 which rose by 10% compound interest each year. The consequence of this was that by 2072 the liability would be 554,000 per annum. The Supreme Court confirmed that as this was the clear meaning of the provision they would not be prepared to re-write it. The topic of escalating ground rents, in particular in relation to the leasehold houses, has been in the media of late and some mortgage companies are beginning to refuse mortgage offers in certain circumstances. There is also a debate as to whether, if the ground rent exceeds 250 per annum or 1,000 per annum in Greater London, it will create a possible assured tenancy. If this was the case then forefeiture provisions would be inapplicable and if the rent was to fall 2 months in arrears there would be a mandatory ground 8 for possession. In late June 2017 the CML produced guidance on Newbuild Leasehold Properties. It states that it may also apply to existing leaseholds dependent on the term. Although merely guidance, and the mortgage companies do not need to change their individual instructions, they are advised to take this into account. The overriding principle is that the borrower should be able to afford the loan. This is also a FCA requirement. If need be, professional advice should be sought from a valuer. A major factor may include the lease term. General Points The CML guidance states the following: Given that lenders must consider both affordability of the borrower, and the sustainability of the value of the property, lease terms which involve obligations for future payment, such as ground rents, are more likely to be considered acceptable for lending purposes if they are set at levels that will not materially change mortgage affordability in the future, or impact on the value of the property; and that the lease length is suitably long (i.e. is granted for hundreds, rather than tens of years). Lenders may query why a property is offered as leasehold. This is particularly so for leasehold houses. It is important that lease information for new homes is made available as early in the home buying process as possible, so that conveyancers and valuers can provide advice and lenders can make appropriate lending decisions. New build leasehold properties 3

7 In relation to ground rents, lenders would expect to see nominal ground rents, reflecting the origins of the ground rent being peppercorn in nature. Under current leasehold legislation, there are certain provisions which present a risk that the lease may be terminated or forfeited by the landlord (freeholder), leaving the property owner without a leasehold interest, and the lender mortgagee without a security. Therefore, lenders will expect that a conveyancer acting on their behalf advises on such risks and how they might be mitigated. An example is the relevant provisions of the Housing Act 1988 in relation to the creation of an Assured Tenancy where the ground rent exceeds 250 per annum or 1000 in Greater London. Lenders will expect professional advisers such as conveyancers and valuers to consider: The length of the initial lease term granted. As a general principle, longer lease terms will help sustain the property s value for longer, as there should not be a need to seek an extension of the lease in the medium term (i.e. over the term of the mortgage). Lenders using the CML Lenders Handbook already stipulate a minimum lease residue requirement (see s of the CML Lenders Handbook). o Lenders recognise that there may be different lease lengths for houses and flats. The mortgage term in relation to the lease term, with particular regard to a likely review of the lease once 80 years or less are remaining. The initial annual ground rent figure. Professional advisers should take into consideration: o the level of the ground rent in relation to the property s market value, o the type of property (e.g. a flat or a house) o whether the ground rent is fixed or rises periodically, o If the ground rent does rise periodically, the formula by which it rises. o Where the property value is below 100,000, some lenders may wish to see a de minimis maximum initial ground rent figure (e.g. 100) is applied. Whether the ground rent figure is at a level which triggers legislative provisions (such as under Part 1 of the Housing Act 1988), potentially creating a risk for the lender s security. The ground rent review formula (if not a fixed figure). Professional advisers should take into consideration: o The CML Lenders Handbook at s , which provides that lenders will accept a periodic increase in ground rent, provided that the amount of the increased ground rent is fixed or can be readily established and is reasonable. o Where the formula is one which uses increases in line with an index, whether the index is a recognised UK index and is appropriate and/or acceptable to them. Some lenders may also expect a cap on the maximum ground rent amount, to guard against the ground rent reaching an unreasonably high sum, which could impact on the property s value, the continued affordability of the mortgage and the future saleability of the property. o Some lenders may be concerned to see the use of compounding formulas, or the use of minimum increases, in conjunction with an index-linked formula. o Where the formula does not link with a recognised index, and instead uses a 4

8 multiplier (e.g. doubles) at set intervals, the frequency of the rent review intervals. There is no single industry view on a minimum acceptable frequency, as it may depend on other factors such as the initial amount of the ground rent, and whether there is a cap on the number of times the rent is reviewed. Other fees charged under the lease o Where other fees are charged under the lease (for example, on a transfer of equity) lenders will expect that these are set at reasonable levels. Where the fees follow the ground rent formula (for example, if they are set at 50% of the prevailing ground rent), lenders will have similar expectations as set out above for ground rent formulas. On 25 th July 2017 the Government produced a consultation paper on ground rents in leasehold houses. Possible changes include: banning newbuild leasehold houses, with some exceptions Banning increases of ground rent at lease than 21 year intervals Preventing ground rents of more than 250 per annum giving rise to assured tenancies Allowing tenants of leasehold houses to have the same rights as those in flats to question the reasonableness of administration charges. The Government also intends to ban help to buy leasehold houses. On 21 st December 2017 a housing White paper was produced. Legislation will be introduced for new build properties only: Banning leasehold houses, save in exceptional circumstances, e.g. shared ownership All new long leasehold dwellings to be at a peppercorn rent Allowing those in leasehold houses to question the reasonableness of administration charges as well as service charges in the same manner as currently available for flats. Allowing freeholders to question the reasonableness of service charges as currently available for leaseholds. The White paper refers the service charge but presumably means such things as estate rentcharges Speeding up the process of leasehold extensions and enfranchisement The Government intends to produce draft legislation by the end of the Parliamentary year of 2018 and then they will introduce legislation into Parliament when time permits. The legislation will not help previous purchasers that the Government thinks that there may be possible action under the Unfair Terms in Consumer Contracts Regulations

9 Higher Ground Rents Be careful where the ground rent exceeds 250 per annum or 1,000 per annum in Greater London. Recently many mortgage companies have refused to accept this. This will also be a problem if the ground rent can double beyond these amounts. It only applies to leases created from 15 January 1989 onwards but this would include lease extensions which constitute a surrender and re-grant. For new leases you may require a term whereby the ground rent does not increase so as to create an assured tenancy. Also, there may be provision whereby the Landlord and their successors will notify any mortgage company before they commence possession proceedings, as in shared ownership leases. Note also that any forfeiture provisions in an assured tenancy are void and also Part 1 Landlord and Tenant Act 1987 does not apply to assured tenancies and there will be no rights of first refusal. Assured Tenancies On or after 15 January 1989, security is provided by the Housing Act Security will exist in favour of an assured tenant, i.e. under S.1: (a) a tenant of a dwelling house let as a separate dwelling (as with the Rent Act 1977 above); and Miller v Eyo [1999] 31 HLR 306 If the landlord wishes to move into occupation and share with the tenant, the lease must contain a clear provision to this effect. To be let as a separate dwelling, cooking, eating and sleeping must be carried on in the premises. Uratemp v Collins [2001] IEGLR 156 recognised that a hotel room which where there was no cleaning provided, might give rise to an assured tenancy. It is important that hoteliers realise this fact. If the premises constitute a persons principal home, even though cooking facilities are not provided, there will be an assured tenancy. See also Adam v Akram (2002), Times 19 th November where a tenant shared a kitchen and bathroom with the landlord he still had security of tenure. (b) (c) let to an individual(s); (i.e. not a company let); and let as their only or principal home. See Crawley Borough Council v Sawyer [1988] 20 HLR98. Premises might remain an only or principal home even after a substantial absence. The best course of action would be to serve a notice seeking possession, if the lease allows this, then 6

10 service might be at the last known address under S.196 Law of Property Act 1925: Chesterfield Borough Council v Crossley (1998) 24 April, CA. See also Blunden v Frogmore (2002) 21EG85 service is covered by the terms of the lease. Again, there are certain exclusions, in Schedule 1, e.g. (i) (ii) (iii) holiday lets; student accommodation let by a higher education establishment; resident landlords - however, the landlord must be resident as his only or principal home. This may prove more difficult to demonstrate than residence under the Rent Act Possession proceedings An assured tenancy can only be brought to an end by means of a court order: S.7. If the tenancy terminates contractually (e.g. by a break clause or effluxion of time) then S.5 operates to create a statutory periodic tenancy. A preliminary to possession will be service of a S.8 notice seeking possession which must be in prescribed form and state which grounds are to be relied upon (during any fixed term, only grounds 2,8,10-15 and 17 may be used). Consider e.g. Mountain v Hastings C HLR 427, CA The tenant was 8 months in arrears of rent. The landlord sought possession on ground 8 - defined rent arrears. When issuing proceedings under s.8 HA 1988 the landlord referred to ground 8 and wrote "At least three months rent is unpaid". Later, under the heading "particulars", he stated the monthly rent and how much was owed. Held: this was a substantial deviation from the prescribed form in that the tenant was not made aware of what she needed to do i.e. repay the arrears prior to the hearing. The notice was void. Torridge District Council v Jones [1985] 18 HLR 107 Although a public sector secure tenancy case, the principle remains the same. Here the notice stated that "the reason for taking these proceedings are non-payment of rent ". This was an insufficient notice. South Buckinghamshire District Council v Francis (1985) 11 CL 152 Similarly "Various acts of nuisance" as a ground did not amount to a sufficient notice. 7

11 The Grounds for Possession The court may award possession if grounds are shown. Again, some grounds are discretionary, and depend on reasonableness. Other grounds are mandatory. Discretionary Grounds The major discretionary grounds are: Ground 9: Ground 10: Ground 11: Ground 12: Ground 13: Ground 14: suitable alternative accommodation some rent arrears persistent delay in paying rent; breach of some other contractual term; deterioration of the dwelling nuisance of annoyance Mandatory Grounds Grounds 1 to 5 require written notice in advance of the tenancy agreement, unless the court dispenses with the need. It seems that the courts are readily willing to dispense with notice as being just and equitable. Boyle v Verrall [1997] 04EG145. It was just and equitable to dispense with notice where the landlord had failed to serve an S.20 notice of an assured shorthold tenancy. Service Charge Liability The Government has commenced consultation on building regulations and fire safety in the light of the Grenfell Tower disaster. It will look at possible changes to construction, conversion and ongoing management of buildings and possible changes to enforcement. In the light of this, fire safety risk assessments in particular may be changed in the future. Both residential and commercial service charges are likely to be greatly effected, especially, where is usually the case, service charge allows recovery of payments for improvements and statutory works. In Finchbourne v Rodrigues [1976] All E.R 581 it was held that there would be an implied term that the work must be reasonably incurred. In council house right to buys, the purchaser will be given an estimate of future works within the next five years from purchase but after this time the service 8

12 charge may increase greatly. Due to the so called Florries Law, the liability of former council tenants cannot exceed 10,000 in any five year period. However, this will only apply in relation to works funded by Central Government. Under the Service Charge Consultation Requirements (England) Regulations 2003 and the Service Charge Consultation Requirements (Wales) Regulations 2004, which came into force on 31 October 2003 and 1 March 2004 respectively, then if consultation does not occur between landlord and tenants in relation to service charges and dwellings, there will be a statutory cap of 250 for the works. Therefore, it is suggested that a management enquiry is made to the effect of, whether there has been any major works within the meaning of the Regulations and if so did consultation occur. 9

13 ESTATES RENT CHARGES Enforceability of Positive Covenants 1. Positive Covenants and Restrictions The problem here is that in freehold land a positive covenant will not burden third party purchasers. See Austerberry v Oldham Corporation [1885] - this was confirmed by the House Lords in Rhone v Stephens [1994] 2 All ER 65 where maintenance of a flying freehold roof could not be required against third party purchasers. Mortgage companies may be required to be told about flying freeholds and insurance may be available. It is suggested that the best manner of enforcement would be to include direct covenants and restrictions on the register. There are many ways of circumventing this, e.g. estate rentcharges and the doctrine of mutual benefit and burden, i.e. if a right is claimed, a corresponding obligation must be taken on. The classic example of this is in relation to maintenance of private roads and drains in small estates. This is not suitable however in relation to overage. Direct covenants and restrictions Here each new purchaser enters into a direct covenant with the original seller or their successor. They are therefore contractually bound. A restriction should be placed on the register (in registered land) to the extent that no disposition is to be registered unless the transferee produces to the Land Registry a deed of covenant in that form. Stamp Duty Land Tax SDLT will attach to positive overage but not to negative. A best estimate of the total consideration based on the contingent event occurring, no matter how remote, must be made and the tax calculated accordingly, e.g., ransom strips and restrictive covenants. When the triggering event actually occurs a further return must then be made. Developers should accommodate any extra SDLT liability in their tendering process. A deferral form may be obtained from the Birmingham Stamping Office. How any estimate of final liability may be made is debatable but note that the client must be made aware that if a trigger event occurs, they will have to fill in a new return with a balancing payment. If the estimate were to tip the SDLT liability from one band to another, the higher payment must be paid initially. On subsequent transfers where there is clawback post 1 December 2003, enquiry must be made as to whether a deferral was requested. If this has occurred then the subsequent 10

14 purchaser will have a further tax bill on the trigger event occurring. The CPSE Enquiries envisage that a request to see the Land Transaction Return must be made. 2. Section 33 Local Government (Miscellaneous Provisions Act) 1982 As above, Local Authorities may enforce positive covenants if they invoke their powers under the Act and the transfer refers to the 1982 Act, or its predecessor, the Housing Act Estate Rentcharges Estate Rentcharges can still be created post the Rentcharges Act 1977, which prohibited new annuity rentcharges. The rentcharges will reflect maintenance costs, and will have a right of re-entry if the payment is not made. Note: HSBC appear not to give mortgages where the estate rent charge has right of entry. Smith Brothers Farms Ltd v Canwell Estate Company Ltd [2012] EWCA 237. An Estate Rentcharge, to be valid, needs to reflect maintenance costs and cannot have a profit element S.2(5) Rentcharges Act Here, the Estate Rentcharge covered maintenance for the whole of an estate including roads which would not be used by the covenantor. It was still valid as maintenance need not be in relation to the particular piece of land of the covenantor. The Problem S1 of the Rentcharges Act 1977 provides that a rentcharge created since implementation is void if it has any profit elements. The rentcharge must collect purely from maintenance. However, administration charges can be expensive and clients should be warned of this. Unlike leasehold flats and administration charges there is no statutory ability to question the reasonableness of administration charges. It must be made clear in the provisions that charges must be reasonable. Even then application through the Courts, and not Tribunals, to question reasonableness may be difficult. Note: Currently there is no obligation that the estate rent charge administration costs are reasonably incurred. Even if such an obligation existed, there is no ability to question the estate rent charge in the tribunals and there would have to be much more costly court proceedings. Note: Roberts v Lawton [2016] UKUT 396 (TCC) s121 of the Law and Property Act 1925 allows the holder of a rentcharge to appoint trustees who will be tenants under a 99 year lease if a rentcharge is not paid within 40 days of being due. This will be the case whether the charge is formally demanded or not. Here the arrears amounted to between 6 and 15. This was held to be a lease which can be registered at HMLR. The lease will continue even if the arrears are paid. In the present case, the holder of 11

15 the rentcharge used this fact to hold home owners to a ransom in order for them to pay administration charges. 4. Mutual Benefits and Burden: The rule in Halsall v Brizell (1957) If a landowner wants to obtain a benefit, then it must submit to any corresponding burden. This may be by way of enforcing obligations in relation to private roads in smaller developments. However, the Thamesmead Town v Allotey (1999), payments for maintenance of private roads and drains was able to be collected, but not for gardening and landscaping if the owner does not wish to avail themselves of such rights. Note: Post the above case, a mortgage company may well require direct covenants and restrictions on the register in relation to maintenance of private roads and drains. This will often be the case in anything but the smallest of developments. Wilkinson v Kerdene Ltd [2013] EWCA 44. Here, the doctrine of mutual benefit and burden was held to apply to the whole of a holiday village in Cornwall. This included maintenance of roads, car parks, footpaths and other recreational facilities and also maintenance to the outside of bungalows and the foul sewer system. 5. Long Leases If the lease was created pre 1 January 1996, both positive and negative covenants will pass with the land if they touch and concern the land, i.e. they are leasehold covenants. Note: Woodall v Clifton (1909) Options to purchase, as opposed to options to renew the lease, will not pass with the land. If the lease was created from 1 January 1996 onwards, then all covenants will pass unless expressed to be personal under Sections 2 and 3 of the Landlord and Tenant (Covenants) Act On enlargement of a long lease without a rent and without forfeiture provisions, positive covenants will pass onto the freeholds under Section 153 of the Law of Property Act Commonhold Under Part 1 of the Commonhold and Leasehold Reform Act 2002, a Commonhold Association may be set up, and the various freeholders will become members. They will agree to be bound by positive and restrictive covenants via the Memorandum and Articles of Association. Since September 2004, very few commonholds have been set up, mainly as there is no right to sublet in relation to a dwelling for more than seven years and thus affordable housing cannot be built into the developments via shared ownership leases. Moreover, as the mortgage companies are concerned at the Commonhold Association being struck off, thus giving rise to a series of flying freeholds, many are reluctant to give mortgages. 12

16 Note: The draft Law of Property Bill was announced in the Queen's Speech Amongst other things it intends to remove the distinction between restrictive and positive covenants. It is undergoing scrutiny by parliamentary select committee. 13

17 STAMP DUTY LAND TAX AND ADDITIONAL DWELLINGS Introduction Stamp Duty Land Tax at a higher rate was announced in the autumn statement of 25 th November It will affect both domestic and foreign purchasers of additional residential properties in England, Wales and Northern Ireland (not Scotland where SDLT no longer applies). The government reminds people that SDLT is a self assessment tax. If a client deliberately or recklessly fills in false information in a Land Transaction Return then they could be prosecuted and also required to pay a surcharge of 100% of the tax owed. The government in their consultation, which was produced on 28 th December 2015, stated that conveyancers would be well advised to require their clients to verify that the property that they are purchasing is their main residence. The Finance Act 2016 was published on 16 th March It adds to the Finance Act 2007 a schedule 4 ZA. Guidance is now available but the land transaction return will not be amended. Where the higher rate applies the conveyancer must fill in code 04 in question 1. If a rebate is claimed this must be done online and within a year of submission 3 months of the rebate becoming due whichever is the latter. The rebate must refer to the reference number on the original land transaction return and so presumably this will have to be filled in by the conveyancer. The HMRC say they expect any money to be paid within 15 days but cannot promise this. A hard copy is also available via the Birmingham Stamping Office. The Finance Act 2016 finally received the Royal Assent on 15 th September Note: The HMRC guidance was amended in December 2016 and again in March Basic Principles The provisions apply to any second property where a major interest is being acquired. This will include a freehold purchase or a lease of more than 7 years duration. The purchase price must be not less than 40,000. The provisions will not apply to the purchase of a reversionary interest which does not take affect in the future for more than 21 years. The provisions will also not apply to the replacement of a main residence. Note: Bizarrely, the provisions would apply to leasehold enfranchisement and leasehold extensions where the consideration is 40,000 or more. HMRC have now confirmed that they believe this to be the case. 14

18 Transitional provisions If contracts were exchanged prior to 26 th November 2015 but not completed until on or after 1 st April 2016 then the old regime will still apply. However, there are exceptions i.e. where there is an assignment of rights under the contract, an assignment of the contract or a sub-sale or where there is a variation of the contract or completion through exercise of an option or right of pre-emption. The Guidance suggests that variations such as changing the colour scheme or the completion date are not sufficient to trigger the surcharge but adding a name to the contract or adding to the duration of the lease or presumably adding to the premises, will be. Higher Residential Thresholds As of transactions from 17 th March 2016 the commercial non domestic thresholds also change. Relevant consideration Current SDLT rate Higher rate Up to 40,000 0% 0% Between 40,000 and 125,000 0% 3% * Between 125,000 and 250,000 2% 5% Between 250,000 and 925,000 5% 8% Between 925,000 and 1,500,000 10% 13% More than 1,500,000 12% 15% * This rate will also be charged on the first 40,000 of consideration. Note: Note: Once the 40,000 threshold is exceeded then the higher rate is due on the total consideration. Mixed business/residential properties may be treated as commercial premises. Multiple Dwellings Relief The original government consultation suggested that they were looking at an exemption where the company or collective investment scheme owned 15 or more properties or where an individual was buying 15 or more properties as part of one transaction. This is not included in the Finance Act. If a person is claiming multiple dwellings relief, which was introduced on 16 th July 2011 by virtue of the Finance Act of that year, then they will have to pay on the average unless they elected for it to be a link transaction. In any case the higher threshold will apply and the average will have to be 4% and 15

19 not the current 1% per dwelling. If 6 or more residential properties are being purchased as part of one transaction then it may be treated as either a domestic or a non-domestic transaction. Because of the changes to commercial property SDLT, as above, then it might not be beneficial to claim as a commercial transaction as it previously might have been. Definition of a dwelling Regulation 17 of the Finance Act sets out the rules for determining what defines a dwelling: (a) A building or part of a building counts as a dwelling if: it is used or suitable for use as a single dwelling, or (b) it is in the process of being constructed or adapted for such use. Land that is, or is to be, occupied or enjoyed with a dwelling as a garden or grounds (including any building or structure on that land) is taken to be part of that dwelling. Land that subsists, or is to subsist, for the benefit of a dwelling is taken to be part of that dwelling. The main subject matter of a transaction is also taken to consist of or include an interest in a dwelling if: (a) substantial performance of a contract constitutes the effective date of that transaction by virtue of a relevant deeming provision (b) the main subject-matter of the transaction consists of or includes an interest in a building, or a part of a building, that is to be constructed or adapted under the contract for use as a single dwelling, and (c) construction or adaptation of the building, or part of a building, has not begun by the time the contract is substantially performed. The Guidance states that buying off plan will trigger the higher rates. There is no mention of a plot purchase with planning permission but presumably this will not. The guidance also recognises that in certain circumstances it may be difficult to decide whether one or two dwellings are being purchased. This will be a question of fact. Consider, for instance, the purchase of a house with an annexe or a granny flat. The Government have now announced that they will change the Finance Act to make clear that the existence of a residential annexe or granny flat will not give rise to two separate dwellings. Note: The Government announced that the final version of the Finance Act 2016 will make clear that residential annexes and granny flats will not come within the provisions. 16

20 Note: In April 2018 Stamp Duty Land Tax will be delegated to the Welsh Government. In July 2016 they announced that they would change the additional dwelling provisions. Residential annexes and granny flats Originally residential annexes came within the legislation. The government has now changed section of the Finance Act as follows: A residential annexe will not qualify as an additional dwelling if it is in the grounds of the original dwelling and if the value ofany annexe or combined value of annexes is one-third or less than the value of the whole. HMRC seem to interpret the meaning of grounds widely. The provisions do not apply to linked transactions although multiple dwellings relief may be available. Islamic Mortgages Originally the creation of an Islamic mortgage could give rise to the additional liability. This will also be retrospectively changed under the final Finance Act The need for more than one property The higher rates of tax will not apply if the individual only has one residential property at the end of the date of the transaction, irrespective of whether it is the main residence or not. If the purchaser at the end of date of the transaction is replacing the main residence with another then the higher SDLT rate will not apply. See examples (as extracted from the higher rates of SDLT on purchases of additional residential property consultation paper from Example 6 Z already owns a main residence and is purchasing a property that will be used as a buy-to-let. At the end of the day of the transaction she owns two properties and has not replaced her main residence, so the higher rates will apply. Example 7 A owns both a main residence and a second home. She sells her main residence and purchases a new one. Although she has two properties at the end of the day of the transaction, she has replaced her main residence so the higher rates will not apply. Example 8 H owns a main residence. He is purchasing a new main residence, but rather than selling his previous main residence he will rent it out. At the end of the day of the transaction H owns two properties and is not replacing a main residence (as he is not selling his previous main residence), so the higher rates will apply. 17

21 Example 9 N purchases her first property, which she will use as a buy-to-let. At the end of the day of the transaction she owns one property, so she will not pay the higher rates of SDLT, even though she is not using it as her main residence. Two years later, N purchases a residential property which she will use as her main residence, but she decides to keep her buy-to-let property. In this instance, as she has two properties at the end of the day of the transaction and has not replaced a main residence (as she has not sold a previous main residence), the higher rates will apply. Example 10 O is a buy-to-let investor with 10 residential properties in his portfolio. He also owns one residential property which he uses as his main residence. He decides to sell his previous main residence and purchase a new main residence. At the end of the day of the transaction, he owns 11 properties his new main residence and his 10 buy-to-let properties. However, as he has replaced his main residence he will not pay the higher rates of SDLT. If by the end of the day of the transaction the purchaser has two properties which have been, is currently, or are to become their main residence then the higher rate will apply. If one property is then sold within the next 36 months (and not 18 months as proposed by the consultation) then they can specifically ask for a rebate. It may be asked how they are to find the money in the first place as after 30 days they will then start to pay penal interest rates. It was announced in the budged of 2017 that the submission time for tax returns could go down to 14 days in early Note: If there is a problem in the chain the client may have to pay the additional higher rate SDLT but this will not be known in advance. The client may not have the money. Currently mortgage companies will not release funds unless all SDLT has been obtained by the conveyancer prior to release of funds. This is obviously a problem right now and not just as of 1 st April 2016 as completions may not occur by 31 st March Married Couples and Civil Partners Married couples and civil partners who own one property at the end of the date of completion will not be liable to the extra tax. However, if one then buys an additional property it may be chargeable to SDLT if not their main residence. As with Capital Gains Tax private residence relief will not be applied if there is a: divorce through court order 18

22 deed of separation has been executed by reference to s1107 Income Taxes Act they no longer live together and there is no realistic possibility of this occurring in the future. Note: If any minor children have any interest in the property then this may also give rise to tax liability on behalf of the married couple. Corporations If a company or collective investment scheme purchases a single dwelling then this will be chargeable to the higher rate. It may also be chargeable to annual tax and enveloped dwellings if the purchase price is more than 500,000 as of 1 st April This is an anti-avoidance provision. Unless exempt, a company purchasing a property for more than 500,000 will pay SDLT at 15%. The additional 3% will not be added to this. However, exempt companies, such as property letting companies, will pay the additional 3%. It appears that transactions which are completely exempt from SDLT such as, with provisos, buying by a property trading company or part exchange with a builder will still be completely exempt. Certain corporations can still claim relief for instance part exchange with a builder and chain breaking companies. It appears from the latest HMRC guidance that this will not apply if the company does not complete on the purchase but transfers under a power of attorney. Joint Purchasers As with other tax systems, any joint purchaser who has two properties by the end of the day of completion and are not replacing their main residence will be required to pay the additional tax. Purchasing property for children For children to live in, e.g. whilst at university, will also attract the additional tax. Timeshares In the government guidance they recognise that not all timeshares give right to property rights and leases. Some do and if this was the case then it would be subject to the additional tax. Holiday Lets Holiday lets will also be subject to the additional tax. Caravans / Mobiles Homes / Houseboats These are not subject to SDLT and therefore any additional liability will not apply. 19

23 Partnerships As with SDLT generally these will be treated as joint purchasers, i.e. when any one partner buys an additional property this will be chargeable at the additional SDLT. Determining a main residence Although not in the Finance Act, the government consultation suggests the following are factors: where the residence is stated on government documents correspondence addressed to various organisations, e.g. driving licence where the purchaser and family spend their time where children go to school where the majority of belongings and furniture are where the workplace is In Frost v Feltham [1981] STC 115 it was stated that the main residence is not necessarily where the person spends most of their time. Determining main residence will be a question of fact. Replacing the main residence The government guidance suggests a two stage process: Stage 1 Whether in the last 36 months the property being sold has been a main residence. This will be a question of fact, as above. Stage 2 Whether the new property is intended as the main residence. This will be subjective and depend on what the purchaser s true intentions are. Note it may be prudent to require some statement from purchasers as to whether the property is their main residence together with making the purchaser aware of the consequences of their statement being false. 20

24 Properties owned outside England, Wales & Northern Ireland Purchasing abroad or in Scotland will not be chargeable to SDLT. However, if someone owns a property abroad and then purchases a non main residence in England, Wales or Northern Ireland post 1 st April 2016 this will be chargeable to SDLT. Again, a statement to this effect may be required. The government also suggests that lawyers and agents should be looking at any past transactions relating to the particular client. Examples below, as extracted from the higher rates of SDLT on purchases of additional residential property consultation paper from Example 30 R owns a property in Wales, which she uses as a main residence. She decides to purchase a buyto-let property in Scotland. SDLT is devolved to Scotland, so she will not pay SDLT, but the Land and Buildings Transactions Tax (LBTT) on the purchase of the buy-to-let property. The rates and structure for LBTT are set by the Scottish Government. Example 31 S owns a property in Scotland, which she uses as a main residence. She is purchasing her first property in England, Wales or Northern Ireland, which she will use as a second home. At the end of the day of the transaction she owns two or more properties globally and is not replacing her main residence, so she will pay the higher rates of SDLT. Example 32 T owns a property outside England, Wales and Northern Ireland which he uses as a main residence. He decides to sell that property and purchase a residential property in England, Wales or Northern Ireland. At the end of the day of the transaction he owns one residential property globally, so he will not pay the higher rates of SDLT. Beneficial interest behind a trust Where there is a bare trust or interest in possession, any property will be deemed to that of the beneficiary and if the beneficiary has other properties the additional tax will apply. More remote interests such as under a discretionary trust, will be treated as properties of the trustees. If a beneficiary behind a bare trust or with an interest in possession owns another property this may attract the additional tax. It will not matter if someone else also has an interest in that property. The additional tax will still be paid. Inheritance Where a person becomes entitled to an interest through inheritance in the past 3 years, the property can be ignored provided that the beneficiaries became joint owners with no more than a 50% interest together with their spouse or civil partner at the date of inheritance. 21

25 LAND TRANSACTION TAX & ANTI- AVOIDANCE OF DEVOLVED TAXES (WALES) ACT 2017 On 1st April 2018 the Welsh Government will introduce a new version of Stamp Duty Land Tax for Wales. The Collection and Management of Tax (Wales) Act 2016 has now created the Welsh Revenue Authority (WRA) which replaces HMRC in the collection of LTT. New forms will be introduced but we do not yet know what they will look like. The Land Registry is assisting in defining where exactly the English-Welsh border is. Transitional provisions were produced in January The legislation will apply if contracts were exchanged prior to 1 st April 2018 unless exchange was prior to 17 th December 2014 (when the Wales Act 2014 came into force) and the contract has been substantially performed. Linked transactions that occur from 1 st April onwards will be within the new regime as will the surrender and re-grant of any lease. On 4 th October 2017 the Welsh Government produced the new rates and thresholds for the tax. However, it was announced in February 2018 that the starting residential threshold would go up from 150,000 to 180,000. New forms were produced in February SDLT and additional dwellings, as above, will remain but with some clarification. The following changes will be made: General Anti-Avoidance Rule This will allow any devolved tax that has been avoided as a result of an artificial tax avoidance arrangement to be recovered. Relief Targeted Anti Avoidance Rules The Act includes a single rule applicable to all relief that prohibits a relief from being claimed where the transaction forms part of tax avoidance arrangement. 22

26 Deferral of Tax There will be new rules relating to the deferral of tax in cases of contingent or uncertain considerations, such as overage. They seem to be similar to current provisions Overage SDLT will attach to positive overage but not to negative. A best estimate of the total consideration based on the contingent event occurring, no matter how remote, must be made and the tax calculated accordingly, e.g., ransom strips and restrictive covenants. When the triggering event actually occurs a further return must then be made. Developers should accommodate any extra SDLT liability in their tendering process. How any estimate of final liability may be made is debatable but note that the client must be made aware that if a trigger event occurs, they will have to fill in a new return with a balancing payment. If the estimate were to tip the SDLT liability from one band to another, the higher payment must be paid initially. On subsequent transfers where there is clawback post 1 December 2003, enquiry must be made as to whether a deferral was requested. If this has occurred then the subsequent purchaser will have a further tax bill on the trigger event occurring. The CPSE Enquiries envisage that a request to see the Land Transaction Return must be made. Rent in new residential leases Unlike SDLT the rental element will not be chargeable to tax. Higher Rates residential property transactions There will be additional rules including: - The acquisition of certain residential properties will be exempt from higher rates where an interest in a dwelling is retained by the buyer pursuant to a court order on divorce or dissolution of a civil partnership. - Whether a tax payer owns or acquires a residential property subject to a lease is judged at the end of the affective date of acquisition. - A dwelling purchased and held by a court appointed deputy on behalf of a minor who lacks mental capacity not deemed to be owned by the child s parents and not subject to higher rates. - LTT requires an assessment for the higher rates of tax liability to be undertaken on intermediate transactions and a further return submitted if additional tax is due. 23

27 - If property is inherited, spouses and civil partners who are no longer living together are not to have their respective interests combined in order to establish whether the interest held exceeds 50%. - There will be clarification of rules in relation to major interest. A major interest is defined as a fee simple absolute or a term of year s absolute either legal or beneficial. Land Transaction Wales On 3 rd October 2017 the Welsh Government issued details of the new bands, as below: Residential Properties RESIDENTIAL LTT RATES Price Threshold Main Residential Rates 0-180,000 0% 180, , % 250, ,000 5% 400, , % 750, m 10% Over 1.5m 12% The current rates for SDLT are: RESIDENTIAL SDLT RATES Price Threshold Main Residential Rates 0-125,000 0% 125, ,000 2% 250, ,000 5% 925, m 10% Over 1.5m 12% 24

28 Commercial Properties COMMERCIAL PROPERTY RATES Price Threshold Main Residential Rates Rates of SDLT 0-150,000 0% 0% 150, ,000 1% 2% 250,000-1m 5% 5% Over 1m 6% 5% NET PRESENT VALUE THRESHOLD 0-150,000 0% 150,000-2m 1% 2m+ 2% 25

29 FIRST TIME BUYER RELIEF The budget of 2017 announced that as of 12:01am on 22 nd November 2017 first time buyer relief would be available. Nothing will be chargeable on a purchase price up to 300,000 as long as the purchase price does not exceed 500,000. The dwelling must be the purchaser s only or main residence and all co-owners must be first time buyers, never having held a major interest in a dwelling anywhere in the world. This provision will apply in Wales until 31 st March After that date it will not apply in Wales. 26