The Enterprise Investment Scheme: What tax reliefs are available?
In his latest article, experienced Corporate & Commercial Solicitor Paul Longland answers your questions on EIS tax relief.
In November 2015, the Chancellor of the Exchequer announced that higher rates of Stamp Duty Land Tax (SDLT) would apply from April 2016 to purchases of additional residential properties, such as second homes and buy-to-let properties.
Since then, a number of clients have been surprised to understand how the rules work and who qualifies for the higher rate of SDLT.
Head of the Conveyancing Department, Clare Hallett, is pleased to outline which purchases will incur the higher rates. SDLT is now very complicated and operates quite differently from the old property tax known as Stamp Duty which was replaced in 2003 with SDLT. In order to ascertain that the correct SDLT is being paid we require much more detail. Please remember that, whilst the solicitor completes the form on your behalf, SDLT is a self-assessed personal tax (much like income tax).
Standard rates of SDLT
Firstly, let’s recap on the ordinary rates of SDLT for a residential property purchase which will be your main home:
| Cost of property | Rate of SDLT | EXAMPLE: Buying a property at | EXAMPLE: SDLT required to pay |
|---|---|---|---|
| First £0 - £125,000 | 0% | £120,000 | £0 |
| Above £125,000, up to £250,000 | 2% | £129,000 | £80 |
| Above £250,000, up to £925,000 | 5% | £420,000 | £11,000 |
| Above £925,000, up to £1,500,000 | 10% | £954,000 | £39,150 |
| Above £1,500,000 | 12% | £1,750,000 | £123,750 |
What is the higher rate of SDLT?
The higher rate is 3% above the standard rates of SDLT. This makes the same property values shown above, attract a higher rate of SDLT to be paid.
| Cost of property (buy-to-let or second home) | Rate of SDLT | EXAMPLE: Buying a property at | EXAMPLE: SDLT required to pay |
|---|---|---|---|
| First £0 - £40,000 | 0% | £39,000 | £0 |
| Above £40,000, up to £125,000 | 3% | £120,000 | £3,600 |
| Above £125,000, up to £250,000 | 5% | £129,000 | £3,950 |
| Above £250,000, up to £925,000 | 8% | £420,000 | £23,600 |
| Above £925,000, up to £1,500,000 | 13% | £954,000 | £67,770 |
| Above £1,500,000 | 15% | £1,750,000 | £176,250 |
When does the higher rate of SDLT apply?
The higher SDLT rate applies to all buy-to-let purchases, unless your total individual ownership is limited to one dwelling. This means that you, the purchaser, do not already own any other residential property.
The higher SDLT rate also applies to a second home. It does not matter which is your main residence, the higher rate will apply, unless at the same time you are replacing your main residence with a new main residence.
I’m replacing my main residence, and I have an investment property, what rate will I pay?
If you own a buy to let property, or a portfolio of properties, and have sold your main residence, you will have up to 36 months to buy a new one without paying the higher SDLT rate. This grace period is because, ultimately, you will have replaced your main residence at the end of the moving process.
For someone who wishes to move house but decides not to sell their existing home at the same time, the higher rate of SDLT will apply. Even though they are replacing their main residence with a new one, at the end of the process they will own two properties. If the previous property is then sold within 36 months, a refund of the higher SDLT rate can be applied for.
If someone decides to purchase a buy to let investment as their first property, the higher SDLT rate will not apply. This is because you will only own one property. Please bear in mind that if you own property elsewhere in the world then the higher rate may apply in these circumstances.
If you purchase a property as a buy to let, which requires a buy to let mortgage, you will not be allowed to occupy it – it will be a condition of the type of mortgage that owners (and their relatives) cannot occupy the property. If you take out a residential mortgage for a property, you will not be able to let it out without permission of the lender. So you have to be transparent about whether the property is your residence or an investment and the tax will be attributed accordingly.
Clare says “This seems relatively clear so far, I hope! It becomes less straightforward when two people are involved in buying a property..."
My partner owns another property, I don’t have to pay the higher rate do I?
The higher rate will apply to married couples / civil partners if one person in the relationship already owns a property. People who are married/civil partners are treated as a single entity for the purposes of SDLT.
Married couples who are living separately and intend to be separated permanently, will be treated as individuals, not one entity, for the purposes of SDLT calculations, and therefore will generally not pay the higher rate. The rules are fairly complex in this area and therefore it is vital to get clarification of the SDLT position at an early stage so that you can budget accordingly.
Couples who are not married are not treated as a single entity but their individual position with regards property ownership will be taken into account when they decide to buy a property jointly. For example, a man and woman get together, she owns a small flat which they decide to rent out and buy a bigger house together. The higher rate of tax will apply here. In this example, the higher rate would be applied to the whole purchase price even though only one of them owned another property. It also does not matter in this example whether the property is for them to live in or not. Again this area is very complex and full details are needed to ensure that the correct tax is being calculated.
What about property abroad?
A property abroad is considered in exactly the same way as a property in the UK, so if you own a residential property anywhere in the world, including a second home or a holiday let, you will be liable for the higher rate of SDLT if you buy a property in the UK.
There are some exemptions. Mobile homes, caravans and houseboats are exempt. In most cases, inherited property and annexes do not count as additional property. Generally, Plots of land are exempt, as they are not categorised as ‘residential property’, even if future residential development is planned.
Clare says “We are often the bearer of bad news when explaining how these rules work. It is a tricky piece of legislation and has caught many people out as they do not anticipate the thousands of pounds they now need to pay in tax to purchase an additional property. I recommend calling my team for a quote - explain your circumstances in full and we will be able to clarify what rate of SDLT you must pay.”
It is reported that SDLT revenue for the Government has soared by a third since the system was changed. This is equal to a boost of £2.14bn to the Treasury's coffers. However, the very top of the market has been paralysed, with fewer transactions.
Clare concludes “While revenues have increased, the number of transactions is quoted to have fallen by a rate of 8%. This fall in activity was caused by the SDLT hike making it too expensive for many to move, as well as uncertainty caused by Brexit.”
Our Conveyancing Team, based in Christchurch, also cover Bournemouth, Poole and the New Forest. If you have any questions, you only have to ask us at Frettens. Please call 01202 499255 and Clare or a member of the team, will be happy to chat about your situation and you particular requirements.
