24th July 2020

Ben Gurluk examines the recent changes to Stamp Duty Land Tax in Bloomberg Tax

This article was originally published in Bloomberg Tax and can be accessed here.

On 8 July 2020, the Chancellor of the Exchequer announced that the nil rate threshold for Stamp Duty Land Tax (SDLT) would be increased from £125,000 to £500,000 for purchases in England and Northern Ireland between 8 July 2020 and 31 March 2021. The holiday does not apply to Wales and Scotland.

What are the changes?

The SDLT cut will take effect immediately and no SDLT will be paid on the first £500,000 of the purchase price, provided that the buyer owns no other residential property anywhere in the world. The new rates apply whether you are buying your first home or have owned property before.

The 3% additional rate of SDLT, which applies to purchases of additional properties, is not affected by these changes and will still apply on top of the revised ordinary rates of SDLT. It has been confirmed that companies will also benefit from these changes. Currently, companies that purchase residential property worth over £500,000 pay a 15% flat rate of SDLT, unless a relief of exemption applies.

Was change needed?

According to HM Revenue & Customs statistics, the total SDLT collected in 2018/2019 was £11.0 billion. On the face of it, this appears to be a lucrative tax; however, these figures are 7% lower than the figures for the previous year.

In 2014, George Osborn changed the system from a slab to a slice system and increased the structure, rates and thresholds of SDLT. Osborn introduced further changes that came into effect in 2016, which charged a 3% levy on the purchase of additional homes unless the purchase was to replace a main residence.

These changes have had a dramatic effect on the London and South East property market, which is still in a state of shock. There have been calls for SDLT to be suspended, abolished, or altered. The effects of the COVID-19 crisis has added pressure on Rishi Sunak to act. Additionally, Prime Minister Boris Johnson has previously stated that he wants to overhaul stamp duty, calling it a huge problem.

Will the SDLT holiday boost the property market?

The reaction from professionals in the sector has been mixed to say the least. Some state that amendments to mortgage products would have been more beneficial to first time buyers. Understandably, those who struggled to complete during lockdown and before the announcement will be bitterly disappointed. This may lead to requests to back date the changes, but this is unlikely in practice.

However, according to the Chancellor, the SDLT holiday will result in the average stamp duty bill falling by £4,500.00 and some buyers will save as much as £15,000.00. He also stated: Nearly 9 out of 10 people buying a main home this year will pay no stamp duty at all.

The savings across the board are likely to help the wider economy, which could benefit from a cash injection as buyers renovate their homes, employ tradespeople and purchase white goods and other furnishings.

It will be interesting to see if the announcement prompts increased activity, and whether buyers do actually benefit from the savings as savvy sellers may increase their asking price.

Ideal time for overseas investors to capitalise?

It was confirmed in the Budget 2020 that from 1 April 2021, a 2% SDLT surcharge will apply to non-UK resident individuals, companies and trusts purchasing residential property in England and Northern Ireland. In practice, this means that the rate of SDLT for a non-resident purchasing a property worth over £1.5 million will be 17%.

The additional tax is likely to cause problems for the Prime and Super Prime Central London market, in which there is currently a significant amount of overseas investment. Furthermore, the prices achieved often far exceed the higher threshold of £1.5 million referred to above.

It is likely that non-residents will look to invest in London and the South East before the changes come into force. Investors can benefit from favourable exchange rates. For example, American buyers will be particularly interested, with current exchange rates potentially offering US buyers a discount of approximately 20%.

The increase in rates could lead to non-residents deciding to purchase the corporate entities that own the property, rather than the property itself as these transactions do not attract SDLT. However, this is unlikely in practice due to the additional risk of purchasing a corporate vehicle, as well as concerns about anti-avoidance rules applying on any subsequent de-enveloping of a property.

Will the lenders lend?

It has been an exceptionally tough few months for mortgage lenders and borrowers, with banks cutting many of their deals, as well as home movers and re-mortgagers facing uncertainty.

The self-employed have seen their options for new mortgages limited, and lenders have made enquiries as to whether buyers in the process of buying have been furloughed with further underwriting often being required.

In order for the system to function, buyers must be able to obtain finance that suits their needs. The global pandemic is likely to limit lending for many purchasers, so the buyers the holiday was intended for may not be able to capitalise.

What happens at the end of the holiday?

The Government has also confirmed that as of 1 April 2021, the reduced rates will revert to the rates of SDLT that were in place prior to 8 July 2020.

There are fears that this could lead to the system, once again, grinding to a halt as buyers rush to complete their transactions before the end of the holiday and the chancellor will need to manage this carefully.

There are signs that the market has rebounded post-lockdown due to pent up demand and buyers assessing their property needs. Remote working will be a key part of our lives for the foreseeable future, so home offices and more outside space are likely to be more desirable. However, there is still likely to be a push for further reform in the future. Although scrapping the tax is unlikely, a reduction in the higher thresholds could be a solution to unlocking the property market.

For further information, please visit the GOV.UK website regarding Stamp Duty Land Tax: temporary reduced rates here.