Details of extra tax on UK buy to let and second homes unlikely before mid-March

The final details of how the extra stamp duty on buy to let and second home purchases will work will not be known until a couple of weeks before the new tax rate comes into effect in April this year.

The government’s consultation period on the proposal for a 3% tax on these kind of property transactions runs until 01 February and officials will then consider the responses and are expected to confirm the final details on the annual Budget announcement on 16 March.

The proposal is that the extra rate will apply to most purchases of additional residential properties where, at the end of the day of the sale, individual buyers own two or more residential properties and are not replacing their main residence. The higher rates will also generally apply to purchases of residential property by companies.

It would seem that the 3% rate will not apply if at the end of the day of the sale an individual owns only one residential property, irrespective of the intended use of that property. However if following the transaction the individual owns two or more residential properties, the applicability of the additional rate will depend on whether the purchaser is replacing their main residence.

Liam Bailey, global head of residential research at real estate firm Knight Frank, has pointed out that while the consultation assumes that most people will buy a new main residence on the same day as they sell their previous one, there will be an allowance for purchasers to have up to 18 months to replace a main residence following an earlier sale.

Also where an individual sells their previous main residence after purchasing a new main residence, a refund of the higher rate could be claimed with the window for this refund limited to 18 months after the purchase of the new residence, he explained.

He also said that it would appear that the location of additional properties will be global, so the ownership of a property in France for example, will be relevant. Also, the new rate will apply if the purchase is completed on or after 01 April 2016. However, if contracts were exchanged on or before 25 November 2015 but not completed until on or after 1 April 2016, the higher rate will not apply.

The details will be important as there are a number of scenarios that could play out, for example parents buying a property for their children, joint purchases between friends and partnerships.

Stephen Barratt, private client tax director at accountants and business advisers James Cowper Kreston, believes that the proposed legislation will create uncertainty, introduce many anomalies and take a long time to fully bed down.

'The fact that the new rules are intended to apply to completions on or after 01 April 2016 will mean that many purchasers will be exchanging contracts now without knowing what the final rules will be. This will create uncertainty,' he warned.

'The additional 3% rate is intended to apply where a purchaser owns more than one residential property at the end of the day of the transaction. The main exemption is where the new property is intended to be occupied as the main residence, but with the additional requirement that it is replacing a main residence,' he said.

'That is all well and good if the old home is sold first. If the old home is sold second, the surcharge will apply unless it is sold within 18 months of purchase, in which case the surcharge can be recovered. Beyond that time, it is a sunk cost,' he added.

He also pointed out that complex rules will apply to married couples and civil partners who will be treated as one 'unit'. 'If, as is quite common, one or both own a home before they marry/enter into a civil partnership and then buy a home together without selling their previous homes, say, for rental purposes, it seems that the surcharge will apply unless all existing residential property is sold,' he explained.

He also believes that the extra tax will apply to the whole price payable for a property by joint owners even if the property is an additional property for just one of them, unless the replacement exemption applies.

'Until now stamp duty has typically been a straightforward matter to administer on residential property transactions as a one off item. If these rules are implemented, and at this stage we only have a consultation document, they will represent a significant additional complexity to property taxation involving additional transaction costs as solicitors and accountants carry out additional due diligence to ensure that the correct rate is applied, and where appropriate, refunds claimed,' said Barratt.

There is speculation that the government is still keen to encourage large scale investment in residential property and an exemption for relevant investors is being considered. It could be that a bulk purchases of at least 15 residential properties would be exempt, irrespective of the nature of the actual purchaser.

There are concerns that the extra tax might reduce demand in the prime central London housing market which has already been suppressed by higher stamp duty announced in December 2014.
Buying a second home in Chelsea for £2 million, for example, now incurs a tax charge of 15% at the top rate and costs a total of £213,750, an increase of £60,000, according to buying agent Nathalie Hirst.
‘I’ve talked to a number of buyers looking for a second home in prime central London and the amount of tax is now quite definitely a deterrent. With them leaving the market, I think it is more than possible that prices might fall,’ she said.

‘Many prime central London property buyers already own a home so they are all being caught by this tax. For many it’s the straw that breaks the camel’s back, they simply think that it’s too much and won’t pay it,’ she added.  
Glynis Frew, managing director of Hunters Property Group, believes that while consultations are always a positive move, she hopes that there is not going to be any further curbs on the buy to let market.

‘There have been a number of attacks on landlords recently, including the autumn statement’s 3% stamp duty announcement. Landlords as a whole are being portrayed as greedy investors who are looking to take advantage of tenants. This is simply not the case, the majority of landlords actually own one buy to let property and are your typical average Joes. It seems strange that no such restriction is in place for those with multiple properties of 15 or more,’ she said.
‘Such financial burdens will inevitably lead to a further rise in rents, as landlords will have to compensate for the extra measures somewhere. However, the basic problem is and remains the lack of homes. If the successive failure to build new homes was rectified this would reduce prices and thus satisfy the need of those first time buyers wanting to get onto the property ladder, help second time buyers move up and bring properties into the rental sector. The issue is still supply and demand,’ she added.

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