SDLT on additional residential properties: subsidiary dwellings
- Since April 2016, a 3% stamp duty land tax surcharge applies to purchases of additional dwellings
- Legislation was amended to exempt subsidiary dwellings, such as granny annexes
- Consider purchasing several properties in separate transactions
- Overpaid stamp duty land tax may be claimed
As anyone who has not been cloistered with Trappist monks will know, since 1 April 2016 there has been a 3% stamp duty land tax surcharge on some acquisitions by individuals of major interests in additional dwellings. The surcharge also catches the acquisition by any other person of a dwelling, even if it is the first or only dwelling owned by that buyer. It does not apply to purchases of non-residential properties nor to those used for both residential and non-residential purposes.
Section 128 of FA 2016 introduces the necessary legislation for the imposition of the additional rate into FA 2003 in the form of new Sch 4ZA. A transaction caught by the surcharge is referred to as a ‘higher rates transaction’, so we now have the higher rate for transactions involving a higher threshold interest (Sch 4A) and the higher rate for higher rates transactions (Sch 4ZA).
Higher rates transaction
The acquisition of a major interest in a single dwelling by an individual is a higher rates transaction when four conditions are met (Sch 4ZA para 3):
- Condition A – The chargeable consideration attributable to that dwelling is £40,000 or more.
- Condition B – On the effective date of the transaction the dwelling is not subject to a lease with an unexpired term of more than 21 years.
- Condition C – At the end of the day that is the effective date of the transaction, the purchaser has a major interest in another dwelling that satisfies conditions A and B.
- Condition D – The dwelling is not a replacement for the purchaser’s only or main residence.
When there is an acquisition of a major interest in two or more dwellings in a single transaction special rules determine whether and how the higher rates apply. A major interest is a freehold or leasehold interest unless the lease was originally granted for seven years or less.
The first draft legislation for multiple dwellings transactions (in paras 5 and 6 of new Sch 4ZA) required two conditions to be fulfilled before a higher rates transaction was established. Paragraph 5 covers the case in which at least two of the dwellings purchased fall within the scope of the surcharge. As originally drafted, there were two conditions in para 5:
- Condition A – The chargeable consideration attributable on a ‘just and reasonable’ basis to the dwelling was £40,000 or more.
- Condition B – At the end of the day that was the effective date of the transaction, the dwelling was not subject to a lease with an unexpired term of more than 21 years.
Paragraph 6 covers the case in which only one of the dwellings forming part of a multiple dwellings transaction satisfies the conditions in para 5. Unless that dwelling is a replacement for the purchaser’s only or main residence, the transaction is a higher rates transaction if, at the end of the day that is the effective date of the transaction:
- the purchaser has a major interest in another dwelling that has a market value of £40,000 or more; and
- that interest is not subject to a lease with an unexpired term of more than 21 years.
Almost before the ink was dry on the Finance Bill, Sir Eric Pickles MP backed a campaign to exempt what the press referred to as ‘granny annexes’ from the additional rate charge. The Treasury defended the measure, saying:
‘Less than 0.1% of the one million property transactions that take place each year in the UK involve annexes and the vast majority of annexes involved in these transactions will not be worth £40,000 or be classed as “separate dwellings”. Therefore they will not be subject to any higher rate of SDLT.’
The reference by the Treasury spokesman to ‘separate’ dwellings is interesting because the legislation does not use this phrase.
A building or part of a building counts as a dwelling for the purposes of Sch 4ZA if it is used, or is suitable for use as a single dwelling or is being constructed or adapted for such use (Sch 4ZA para 18(2)).
‘Used or suitable for use as a single dwelling’ is not defined and will be a question of fact. Case law relating to the meaning of the term ‘dwelling house’ in some housing Acts has indicated that this covers premises that are suitable for all the major activities of residential life.
Off-plan purchases are caught by para 18(5). Some ‘communal’ accommodation, such as halls of residence and care homes, is excluded.
The same definition applies for multiple dwellings relief. So, when the surcharge applies, multiple dwellings relief should also be available. The definition also appears in the annual tax on enveloped dwellings legislation.
If six or more dwellings are acquired in a single transaction, FA 2003, s 116(7) treats them as not being residential property (but where multiple dwellings relief is claimed s 116(7) is disapplied). The surcharge applies by amending Table A in FA 2003, s 55 which is relevant to residential property transactions only.
The Pickles offensive paid off and, in June, a government amendment was tabled removing the acquisition of ‘subsidiary dwellings’ from the scope of the additional 3% charge. The amendment inserted a new condition C into Sch 4ZA para 5 (and therefore, indirectly, into para 6) but not into para 3.
New condition C states that the relevant dwelling is not ‘subsidiary’ to any others purchased in the transaction.
To be ‘subsidiary’:
- that dwelling must be situated within the grounds of or within the same building as the main one; and
- the amount of the total chargeable consideration for the transaction which is attributable on a ‘just and reasonable’ basis to the main dwelling must be at least two-thirds of the chargeable consideration attributable to it and any other dwelling situated as in the bullet point above and forming part of that transaction.
A is buying the freehold interest in a farmhouse and cottage on the same plot from a third party for £915,000. Vacant possession will be given on completion.
A, who sold his previous home in August 2015, has no interest in any other dwelling and intends to live in the farmhouse. The cottage is suitable for use as a single dwelling as it has a living room, bedroom, kitchenette and bathroom and separate services from the farmhouse.
The cottage is therefore a dwelling for the purposes of new Schedule 4ZA FA 2003 (paragraph 18) and also for the purposes of multiple dwellings relief. In the past the cottage has been used as overspill accommodation for the farmhouse.
The value of the cottage is £45,000 therefore the transaction is a multiple dwellings transaction for the purposes of new Schedule 4ZA FA 2003 (paragraph 5). The additional rate does not apply as the cottage is within the grounds of the farmhouse and the value of the farmhouse is more that 95% of the total chargeable consideration.
In the grounds
To be subsidiary, the additional dwelling must be in the grounds of the main property or within the same building. There is no definition of ‘grounds’ for the purposes of Sch 4ZA. The Oxford English Dictionary definition of ‘grounds’ is:
‘An enclosed portion of land of considerable extent surrounding or attached to a dwelling-house or other building, serving chiefly for ornament or recreation.’
The question of what are the ‘grounds’ will, to some extent, be subjective – the grounds of a country house will be more extensive than those of a modest semi.
Paragraph 18(3), ‘What counts as a dwelling’, appears to deem buildings in the grounds of a dwelling to be part of it:
‘Land that is, or is to be, occupied or enjoyed as a garden or grounds (including any building or structure on that land) is taken to be part of that dwelling.’
Does that mean that in such a case there is no additional dwelling for surcharge purposes?
If two flats in the same block are purchased as part of the same transaction – one for the buyer to live in and one for granny – both could escape the surcharge if granny’s flat is worth no more than one-third of the buyer’s.
If the buyer chooses to house granny in the same street (even if she is next door) the exemption will not be available. Also, because para 5 requires that the two or more dwellings must be part of the same chargeable transaction, para 5 will not help if the buyer acquires a granny cottage as a separate transaction.
A purchaser buys a farmhouse together with two cottages and two holiday flats in a converted barn grouped around the old farmyard. He is replacing his main residence with the farmhouse and has no interest in any other dwelling before the acquisition. Each dwelling is worth more than £40,000 and all are sold with vacant possession.
In order for the two cottages and the two flats to be ‘subsidiary’ to the farmhouse the farmhouse must represent at least two-thirds of the total consideration for all five dwellings. Depending on the relative values it could be advisable to structure the purchase as a series of linked transactions to avoid the surcharge applying to all five.
If the farmhouse is worth £800,000 and the total consideration is £1,280,000 removing one of the other four dwellings from the transaction and dealing with it separately later (provided it was worth at least £50,000) could prevent the surcharge applying to the other four.
When para 5 or para 6 applies the entire transaction is a higher rates one.
This has been confirmed by HMRC (see ‘Stamp Duty Land Tax: higher rates for purchases of additional residential properties’ Guidance Note of 16 March 2016 at para 4.8:
‘If two or more dwellings are purchased in the same transaction and at least two of them are worth more than £40,000 and are not reversionary on a lease with more than 21 years to expiry then the transaction will be a higher rates transaction. This is irrespective of whether the individual owns an interest in another dwelling at the end of the day or whether one of the purchased dwellings replaces a main residence.’
This assurance was given before the introduction of new condition C, which is why the note refers to conditions A and B only.
Because of this ‘tainting’ effect, it may be advisable in some cases to acquire a number of dwellings in two (or more) separate transactions, although the sales would be linked. See Separate transactions.
The surcharge came into force on 1 April as a result of a resolution under the Provisional Collection of Taxes Act 1968, s 1(2).
Under this, some buyers paid the additional tax on the acquisition of a second dwelling in the period before the amendment was passed that the transaction would not have been caught by the provisions as amended. Those purchasers would have to claim a refund.
It is understood that HMRC allowed taxpayers affected by the change to the draft legislation to file their land transaction returns after the amendment was tabled. This avoided the need for purchasers to claim repayments of overpaid tax after royal assent.
If the transaction is not a higher rate transaction code 01 (‘residential’) should be inserted as the type of property in answer to question one on the SDLT1; otherwise code 04 should be chosen.
There is a council tax discount for a self-contained annexe when the person who lives in it is a qualifying relative of the owner of the main property. This would have been impossible to replicate for SDLT purposes and it can be seen that condition C goes wider than removing granny annexes from the SDLT surcharge.
Sir Eric Pickles, flushed with success after reducing the council tax bill for ‘granny annexes’, has probably misunderstood how SDLT works but let’s give him the last word (although a victory for common sense is not the way I would describe the new provisions):
“It is a great victory for common sense. Those who convert accommodation to offer a home to a relative, sometimes elderly, sometimes with special needs, should not be penalised”.
A version of this article was originally published in Taxation magazine (October 2016).