SDLT Considerations: Higher Rates for Corporate Buyers

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When a company wishes to purchase residential property, it needs to be aware of the SDLT implications of doing so.

3% Surcharge

If a company purchases a ‘major interest’ in a dwelling then a surcharge of 3% in addition to the usual residential SDLT rates of tax will be payable. HMRC class a major interest as any acquisition of a dwelling involving consideration of between £40,000 and £500,000 where that dwelling is not subject to a lease which has more than 21 years left to run. The SDLT must be paid to HMRC within 14 days of the effective date of the transaction. This will usually be the completion date of the purchase, however, please refer to our earlier SDLT update for examples of when the effective date may in fact pre-date completion.

Who does the 3% surcharge apply to?

Non-natural persons include companies and partnerships.

What is a ‘dwelling’ for the purposes of the 3% surcharge?

A ‘dwelling’ is defined as a building or part of a building that is used or suitable for use as a single dwelling or is in the process of being constructed or adapted for use as a dwelling.

Whether or not a transaction involves the acquisition of, or the acquisition of a major interest in, a dwelling must be carefully considered and should be assessed on the individual facts of each case.

Certain properties such as care homes and student halls of residence are not classed as dwellings, nor are caravans, mobile homes and houseboats. Garden land sold separately from a dwelling also does not qualify. Holiday homes are, however, dwellings. An off-plan purchase where the construction of the dwelling in question is yet to be completed can also, in certain circumstances, qualify for the 3% surcharge.

HMRC guidance states that a building will be classed as a dwelling at the point when the walls begin to be constructed upon the foundations. The key is to gauge the use of a building at the effective date of the transaction. This overrides any previous use or, indeed, any intended future use, both of which are irrelevant as to whether or not a property constitutes a dwelling.

Purchasing multiple dwellings

If two or more dwellings are purchased in a single transaction, a buyer (whether corporate or otherwise) may be able to be claim multiple dwellings relief. Where six or more dwellings are purchased in a single transaction, a buyer can decide whether to apply the non-residential rates of SDLT or claim multiple dwellings relief and pay the 3% surcharge residential rate, depending on which is the cheaper option.

The 15% higher rate

If a non-natural person purchases a dwelling for consideration of more than £500,000, a higher rate threshold for SDLT of 15% will apply. SDLT is again payable within 14 days of the effective date of the transaction.

There are, however, various exclusions from the higher rate charge which a corporate entity may make use of, namely:

  • the company purchasing the property is acting as a trustee of a settlement;
  • the property is being purchased solely for the source of rents it will generate by way of a property rental business (with a view to profit);
  • the property is being purchased exclusively for the purpose of development or re-development and resale as part of the property development trade;
  • the property is being purchased as part of a qualifying exchange;
  • the property is being purchased for resale as part of the stock of a property trading business run on a commercial basis;
  • the property is being purchased for occupation by certain non-qualifying individuals;
  • the property will be made available to the public for a qualifying trade for at least 28 days a year with a view to profit;
  • the property is being purchased for a financial institution acquiring the dwelling in the course of lending;
  • the property is being purchased for occupation by certain employees and partners;
  • the property is a farmhouse and will be occupied by a farm worker in the normal course of trade; or
  • the property is being purchased by a qualifying housing co-operative such as a housing association.

Where the conditions of any of the above exclusions are met, the 15% higher rate would not apply but the transaction would still be liable to the 3% surcharge. Furthermore, if the conditions of the exclusion being claimed cease to be met in the 3 years preceding the effective date, then the exclusion can be withdrawn, at which point the higher 15% rate would have to be paid.

The annual tax

The Annual Tax on Enveloped Dwellings (often abbreviated to ATED) is an annual tax which applies to dwellings with a value of £500,000 or more which are owned by non-natural persons such as companies. ATED involves an annual completion of an ATED return. Relief from ATED is available in broadly the same cases as for relief from the 15% rate of SDLT.

What to do

Hopefully this article demonstrates the need for companies who are purchasing residential property to consider as early as possible the SDLT implications of the transaction and, where necessary, take specialist advice. As solicitors, we are not tax experts. If, however, you have an enquiry about SDLT and you’re unsure where further to look please do contact our Commercial Property team.

(June 2023)