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Property purchasing could get costlier……………

Written by admin on . Posted in Landlord, Property, SDLT, Stamp Duty. No Comments on Property purchasing could get costlier……………

Although a late reprieve cannot be completely ruled out, the stamp duty cost of purchasing a property in England and Northern Ireland is set to go up from 1 April 2025.

Stamp duty costs have risen now that the temporary £250,000 nil rate threshold has reverted back to £125,000, the pre-23 September 2022 level. First-time buyer discounts will also fall to previous rates.

Landlords

The reduction of the stamp duty threshold from £250,000 to £125,000 will mean an additional cost of £2,500 for anyone purchasing a property costing £250,000 or more as the extra £125,000 of the purchase price is brought into the 2% tax charge.

For landlords, this will come on top of the 2% surcharge increase introduced for purchases from 31 October 2024 onwards. They will have seen their stamp duty cost on, for example, a £350,000 property purchase go up first from £15,500 (pre-31 October 2024) to £22,500 (currently), then to £25,000 (from 1 April 2025) – a more than 60% increase.

First-time buyers

The temporary discounts currently in place mean that first-time buyers in England and Northern Ireland do not pay stamp duty on property purchases costing up to £425,000. So:

  • For purchases costing between £425,000 and £625,000, duty at the rate of 5% is paid only on the excess over £425,000; and
  • No relief is available if the purchase price exceeds £625,000.

From 1 April 2025, the nil rate threshold will be reduced to £300,000, with the higher limit cut to £500,000. The rate will be at 5% where a property costs between £300,000 and £500,000.

Those purchasing property at prices just over £500,000 from 1 April 2025 will need to negotiate for a discount. For example, a £1,000 reduction on a purchase originally priced at £501,000 will save £5,050 in stamp duty.

The online calculator for the amount of stamp duty payable on a property purchase in England and Northern Ireland can be found here.

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Stamp duty hit for landlords

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UK landlords are facing increased rates of surcharge when purchasing buy-to-let property following increases over the past three months. The rate is now particularly punitive for those buying property in Scotland.

Stamp duty was devolved to the Scottish and Welsh Governments in 2015 and 2018 respectively. Rather than stamp duty land tax (SDLT), Scottish property purchasers now incur land and buildings transaction tax (LBTT), with land transaction tax (LTT) paid in Wales.

Increased rates

The surcharge increases are as follows:

  • For SDLT, the surcharge is 5% (previously 3%) for purchases from 31 October 2024 onwards.
  • For LBTT, the surcharge is 8% (previously 6%) for purchases from 5 December 2024 onwards.
  • For LTT, the surcharge is 5% (previously 4%) for purchases from 11 December 2024 onwards.

The top rate of duty in England, Northern Ireland and Wales is now 17% where property costs more than £1.5 million. In Scotland, it is 20% payable once a property costs over £750,000.

For a buy-to-let property costing around £450,000, this means landlords in England and Northern Ireland must now pay SDLT of £32,500. For Scotland, the figure is considerably higher at £54,350, and for Wales, a landlord will pay £36,200.

From 1 April 2025, the SDLT figure will rise further by £2,500 to £35,000 when the nil rate threshold reverts to £125,000 after a temporary increase to £250,000.

Adventurous alternatives

Two ways in which more adventurous landlords can drastically reduce the amount of stamp duty payable is by buying mixed-use property (such as a shop with a flat above it), or by buying a commercial property and obtaining planning permission to convert the property into residential use. Both suggestions work equally well in Scotland and Wales. Conversion is a complex area, however, and expert advice is recommended.

In both cases, duty will only be charged at non-residential rates, so, for that £450,000 property outlined above, the cost will be reduced to £12,000 in England and Northern Ireland, to £11,000 in Scotland and to just £10,250 in Wales.

Online calculators for the amount of duty payable on a property transaction can be found here:

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The end of multiple dwellings relief

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From 1 June 2024, the abolition of multiple dwellings relief under stamp duty land tax (SDLT) will stop disputes about what qualifies as a separate dwelling (e.g. a granny annex). However, the scrapped tax will impact English and Northern Irish buyers who purchase two or more properties in a single, or linked, transaction.

At the moment, multiple dwellings relief reduces the overall SDLT rate when buying two or more properties in a single, or linked, transaction. The buyer pays SDLT based on the average price of each dwelling and benefits from two or more lower SDLT bands.

Relief abolished

The government has abolished the relief due to questionable claims, particularly relating to granny annexes. Unfortunately, genuine claims will now lose their relief, for example, buyers of a country home with a cottage in the grounds, or a town house with a self-contained basement flat. From 1 June, the amount of SDLT payable on a property costing £750,000 containing a qualifying annexe will double from £12,500 to £25,000.

Many buyers have been contacted by companies offering to help them claim back SDLT for a commission, but these refunds are often based on questionable entitlement to multiple dwellings relief.

While the removal of multiple dwellings relief will not affect the majority of properties, you should be aware that:

  • Relief is still available for a contract that was entered into on or before 6 March 2024, regardless of when completion takes place.
  • Otherwise, relief will only be available if a purchase is completed (or substantially performed) before 1 June 2024.

Six or more properties

Where six or more properties are purchased in the same transaction, non-residential SDLT rates can be applied. This means a maximum rate of 5% compared to a top residential rate of 12%; or 15% for a buy-to-let purchase. In the absence of multiple dwellings relief in future, buyers using this option will have to take care to structure such transactions to ensure all properties come under a single contract.

You can find out more about HMRC’s guide to SDLT on the government website.

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Tax implications for the bank of mum and dad

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With property prices expected to fall during 2023, parents may be thinking about getting their children onto the property ladder. However, although help with a deposit does not raise that many tax issues, joint ownership can have expensive tax consequences.

Nearly half of first-time property buyers aged under 35 have received help from the bank of mum and dad. However the following implications should be considered alongside generous intentions.

Help with a deposit

  • Outright gift: This will be treated as a gift for inheritance tax (IHT) purposes. There is no immediate tax cost, but it could mean more IHT is payable if the parent subsequently dies within seven years.
  • Loan: An interest-free loan arrangement avoids any IHT implications, but it could impact on mortgage affordability calculations.


Stamp duty

Joint ownership is likely to mean upfront stamp duty consequences.

  • In England and Northern Ireland, first-time buyers can benefit from a nil-rate threshold of £425,000, saving a potential £8,750 compared to a normal purchaser. However, with joint ownership, all purchasers need to be first-time buyers to qualify for relief; parents are unlikely to qualify.
  • There is a similar, although much lower, relief for Scottish first-time buyers.
  • Furthermore, the inclusion of parents will probably mean that the stamp duty surcharge on second homes is payable. For property in England and Northern Ireland, this is 3%, with higher surcharges for Scottish and Welsh property.

The surcharge can mean an extra cost of £9,480 for a property purchase in England at the latest published average price (October 2022) of £316,000.

Capital gains tax (CGT)

CGT exemption on property disposal only applies if a property has been the seller’s main residence, and this again is unlikely to be the case for a joint owning parent. The tax charge will probably be mainly, or wholly, at 28%. The future reduction of the CGT annual exemption to just £3,000 will not help.

A useful guide on helping a child buy their first home can be found here.

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Finding the right mix in mixed use properties

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A recent tribunal found in HMRC’s favour when a residential property was questionably deemed mixed use.

On the purchase of a mixed use property, stamp duty land tax (SDLT) is paid at non-residential rates rather than residential rates. This is the case regardless of the relative size of the residential and non-residential areas of the property.

Currently, it is beneficial to pay residential rates on a property purchase in England or Northern Ireland costing up to £965,000. However, mixed use treatment is advantageous on more expensive properties, or if the 3% surcharge on additional residential properties would otherwise be payable.

What is mixed use?

It can be quite complicated deciding on the appropriate SDLT treatment when a building is used partly as a dwelling and partly for other purposes, but HMRC does make a clear distinction.

A building where certain rooms, which could otherwise be used as part of the residential area, are used for work purposes – is not mixed use. (For example, where someone has an office at home).

A building that is divided into separate residential and non-residential areas, with the non-residential part adapted for use as commercial or business premises – can be mixed use. (For example, where part of a building is converted into a surgery).

The actual use is irrelevant. The key factor is the degree of conversion required and the degree of separation from the residential area.

A cautionary tale

A recent First-Tier Tribunal case on the meaning of ‘mixed use’ went in HMRC’s favour.

A couple had purchased a property for £2.9 million. They wanted to classify it as mixed use on the basis that the land encompassed a public footpath, arguing that the footpath was used for a separate commercial purpose – namely access to a neighbouring farm. The couple were responsible for ensuring ditches and drains on their side of the path remained clear, but the house itself was entirely residential.

The tribunal held that the shared path was like any other public right of way, and simply formed part of the grounds of the property. It was not a separate non-residential area.

This case involved a tax refund company, and HMRC has said the decision should serve as a warning to those considering getting involved with such agents.

HMRC has consulted on changes to the way SDLT applies to mixed use property, for the future, but no proposals have yet been forthcoming. In the meantime, HMRC’s guidance on how the tax can be found here.

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