Higher rates of SDLT on purchases of additional residential properties

Transcription

1 Higher rates of SDLT on purchases of additional residential properties Consultation meeting 14 January Attendees: HM Treasury, HMRC Representatives of professional bodies, firms and business ( Reps ) Timing of consultation period and implementation The reason for the shorter consultation period was to achieve a balance between its immediate introduction (as is usual for a rate change in order to minimise market distortions) and the desire to get it right for legitimately complex circumstances. A longer period would increase uncertainty. Reps pointed to the effective and transparent (from both HMRC and representatives perspective) consultation that preceded the introduction of ATED (unlike the original introduction of SDLT that suffered from the lack of good consultation and of defined policy drivers). Reps noted that in this case the proposed policy design is open for consultation which is welcome because it means that the technical implementation can be assessed by reference to the policy intent. However, the first sight of the legislation will not be until the 16 March Budget resolutions leading to significant concerns from reps about achieving workable legislation in this timetable. Policy drivers The government s continuing support for the private rented sector was underlined by HMT/HMRC. The genesis of this measure is pressure from constituencies about the difficulties of getting on the housing ladder either because of direct competition from BTL purchasers or, indirectly, because of increased house prices. The driver is fairness not anti- BTLs. There is also recognition of the important part played by large institutional investors in supply, hence the consultation questions on whether there are appropriate circumstances for a targeted exemption. An exemption inevitably entails cliff edge and avoidance concerns but there is a balance to be struck. Majority of transactions unaffected (para 1.1) Reps took issue with this consultation statement as although the majority may not pay the additional rate, most will have to address the risk of paying it if their buyer pulls out. If the buyer of the old main residence fails to complete, bridging finance needs to be raised (expensive) to complete the purchase of the new main residence, in addition the additional 3% rate will have to be paid up front. If a deposit of less than 10% has been accepted from the defaulting buyer (common practice), there may well be a shortfall in meeting the additional 3% (in any case the deposit may be needed to pay the upstream deposit). If a new buyer is found for the old main residence, a refund can be claimed but only after considerable emotional and financial distress.

2 There is a good case for a targeted relief in these circumstances as the risk of this situation does not promote house-buying (the policy intent) and there is no intention to hold two properties, they are forced into it. The number of people that find themselves in this situation may be few but the number of people who will have to worry about it will be many with a knock on effect on liquidity because lenders will be concerned about the additional risk. An insurance product may step in but with added expense. Another consequence may be a move towards full 10% deposits with effects on affordability The consultation proposal of 30 days window will not really help because the Land Registry Official Search period will have expired. Reps noted also that a possible relief in the circumstances described will not reduce revenue because the SDLT is refunded anyway. Additional protective elements could be a requirement that: There are binding contracts the property that is intended to be sold is disclosed the contracts are between unconnected parties ( conveyancers already have to deal with the test) and (possibly) at arm s length there is a further return when the old residence sold With guidance, reps suggested it should be feasible. HMT/HMRC do not want people in the refund situation if instead they can be subject to an exemption that is well-targeted, not open to abuse and operable by residential conveyancers. The reps suggestion gives clear advantages for purchasers cash flow but they are concerned about policing the relief (monitoring the sale of the old residence). 18 month period/ acquisition of a main residence The relatively common situation was raised where the old residence is retained while extensive work is carried out on the new one and more than 18m elapses before the old one is sold. HMT/HMRC suggested that this was a choice rather than an enforced situation; it is also difficult to define an appropriate level of work (painting a wall? substantial conversion?) and if the purchaser has sufficient funds to effect the second acquisition while retaining the old one and renovating, it may be difficult to see the case for an extension to the 18m period. An example of an enforced circumstance is where an interest in a property is inherited with the consequence that the 3% becomes payable on a later acquisition of the main residence. (Administration of estates may be delayed to prevent this happening.) Is this within the policy intent? The order in which properties are bought affects the result; 1) Sell main residence 2) Buy a BTL 3) Buy new main residence within 18m of 1). Result: all purchases fall outside 3% despite owning 2 properties contrary to the policy.

3 . HMT/HMRC recognise that different ordering gives different results- perhaps this is inevitable. Reps suggested that an alternative test might focus on whether the acquisition is of a main residence, if so the 3% surcharge does not apply. HMT/HMRC raised the risk of establishing what is intended to be a BTL in the future as factually a main residence for a short period. Although CGT has a factual test (in the absence of an election), that is looked at retrospectively, it is much more difficult to look at intent for a transaction tax and how could it be checked (even if the numbers are relatively low given that the vast majority are same day sales/purchase). The policy route adopted is to look at the number of properties at the end of the day of the transaction, not whether the acquisition is of a main residence. In situations where an existing BTL or interest is owned meaning that the 3% is chargeable on the acquisition of a main residence because the additional property has not been sold at the date of acquisition of the residence, despite efforts to do so, is there a case for allowing a refund if the sale take places within 18 months? HMT/HMRC noted that if a purchaser in such circumstances had sufficient funds to make the further purchase without a sale, then the case for extending the 18m was not particularly strong again it is a question of choice rather than an enforced problem. One group particularly affected will be returning ex-pats who sold their main residence before being posted abroad but retained or acquired a BTL to keep a foot on the property ladder. Reps said there is a case for extending the 18m in these circumstances. Disregard of less than 100% interest for additional properties test Should a small interest be disregarded by value (less than 40,000) or proportionate interest? Inherited interests are an example. However, HMT/HMRC noted that it would be possible to liquidate such interests before purchase. In any case, as noted, the policy route adopted is to look at the number of properties at the end of the day of the transaction, not whether the acquisition is of a main residence, so it would not be appropriate to simply wholly disregard any other interest if a main residence is acquired. An exemption by reference to value ( 40,000) looks more workable. HMT/HMRC will consider further. Joint purchases Reps noted that charging the additional 3% on a joint purchase where one of the purchasers is purchasing a first property feels inequitable, apportionment would deal with some of the particularly harsh circumstances (eg buying for children, trial granny flats). HMT/HMRC noted the inevitable tension between a fair result and complexity. HMT/HMRC pointed out that charging on the total consideration follows the logic of SDLT although reps pointed to the Pollen case and charities relief where apportionment is effective. In terms of purchasing a property for children to live in, the condoc gives an example of T helping her son S to purchase a main residence by acting as a guarantor on the mortgage. Reps pointed out that mortgagees may not accept a guarantee instead requiring the parent to be a borrower and take an equity interest providing greater security for the loan and the comfort of a well looked after property. Many parents are stretching resources already to help children on to the housing ladder already so an additional cost will be of great concern

4 so this is a key area as HMT/HMRC recognise. Alternatives might be a de minimis equity holding by reference to value or %. The condoc suggests that where a partner owns a property (main residence) all purchases of residential property by the partnership will be subject to 3%. Reps pointed to the adverse effect on SMEs such as farming and vet partnerships ( adding to business costs) so consideration might be given to excluding a property occupied by an employee as a condition of employment ( ie not a choice but a necessity). Leases The condoc indicates that leases worth less than 40,000 will not be taken into account when determining if an additional residential property is being purchased. HMT/HMRC noted that a market rent lease would have little capital value so the current proposal is to allow the 40,000 de minimis to deal with leases. Reps noting that valuation posed problems in more complex cases. A disregard for leases of less than 7 years may offer a better solution. The 40,000 should largely deal with reversionary leases. In the case of a freehold reversion valued in excess of that limit, it does not seem consistent to count it as an additional property because it is not depriving anyone else of a home. (For example, buying a house and converting it into two flats for sale while retaining the freehold reversion that may be valued in excess of 40,000 but that value does not represent a residence although it is an interest in property.) Where should the cut-off be? The reversion of an initial 21 year lease is used in MDR and was used in First Time Buyers Relief. HMT/HMRC will reflect. Transitional period Some reps expressed disquiet over the transitional provisions particularly for off plan purchasers where it may be impossible/ very difficult to complete or substantially perform before 1 April. Reps asked when the 18 month window for claiming replacement of main residence exemption will start from? Take the example of someone who sold his main residence 10 months ago and has no other property except a ski chalet in the Alps. If his 18 month window started 10 months ago, he only has 8 months left in which to find a new main residence before the 3% will apply. Reps suggested that, as a transitional measure, the 18 month window should start on 1 April 2016 (therefore effectively expiring by 1 October 2017). When he sold his main residence, he had no way of knowing that, by doing so, he was triggering an 18m period. HMT/HMRC will consider. Companies HMRC/HMT noted that the policy intent would be clearly undermined if additional properties could be purchased via a company without incurring the additional 3%. In terms of larger scale purchases and a possible exemption, the thinking is that those purchasing in sufficient scale (in later thinking, whether as individuals or companies the

5 focus is on what is being done not the legal form) who by doing so secure a development that would otherwise not go ahead are supporting supply. Reps noted that any exemption should extend not only to new build (part or completed developments that are sold on) but also to conversion/refurbishment. The question was posed whether 15 is the right number, for example why exclude a 10 flat conversion? Reps noted that buying a number in one batch does not reflect reality. Flats come on stream at different times eg by floor/ building. Any exemption should take into account phased purchases. From a developer s perspective BTL purchasers in a development are essential to secure finance. To obtain development finance, it is necessary to show that a percentage of buyers have been secured (say 20-25%). An owner occupier cannot usually borrow for an off-plan purchase until 6 months before practical completion. Therefore BTL purchasers have to form the required percentage to provide the finance. The development may target first time buyers but the BTLs facilitate the finance without which the SME developers cannot proceed. The additional 3% taken with the interest restriction will reduce the number of BTLs thereby hitting supply. HMT/HMRC s challenge was that alternative funding mechanisms may need to be found. They are interested in the circumstances that will lead to a development not going ahead. In terms of numbers, most BTL purchasers would buy say, 3-5 not 15 properties (they might reach 15 ultimately). Some spread their purchases in different schemes and buy via individual companies to facilitate sale and mortgage finance. The existing section 116(7) level of 6 or more may be an alternative. HMT/HMRC had some concerns about a relief provided to wealthy investors holding 15 properties. A diversely held test may sit better with the policy rationale. The non-resident CGT exemption for diversely-held entities might be considered TCGA 1992 section 14F and Schedule C1. Reps also pointed to the Schedule 4A reliefs (excluding lettings of course) as a possible model for reliefs. HMT/HMRC confirmed that the surcharge will not apply to the Schedule 4A higher rate. Further points raised but not discussed If an interest in a partnership holding residential property is acquired, will the new regime look through the partnership interest such that it constitutes an additional property for the purposes of the 3%? It has been indicated that a de-enveloping relief may be considered as part of the forthcoming IHT consultation on non-uk domiciliaries holding UK residential property through offshore structures. The decision to de-envelope is affected by both the 3% and any de-enveloping relief but the uncertainty particularly around whether a de-enveloping relief will be introduced makes the decision to de-envelope ( in accordance with government policy) difficult. It would be helpful if the position could be confirmed before the issue of that consultation. 15 January 2016