Background
In a Budget that contained very little of note, one of the most
significant changes was the proposed 5% rate of SDLT for
residential property purchases over £1m. This new rate is due
to apply from 6 April 2011. The rate for non residential property
remains at 4%.
This news will pose something of a problem for those involved in
rural property transactions where only part of the asset being
purchased can be classified as 'residential'.
Residential property
The definition of residential property is a building or
structure that is used or suitable for use as a dwelling together
with any related land that is garden or necessary for the
reasonable enjoyment of that dwelling having regard to its size and
character. Land in excess of 0.5 hectares will be scrutinised. This
mirrors the test for private residence relief for capital gains tax
purposes.
Significantly, where six or more properties form part of a single
transaction, the SDLT rules, rates and thresholds for non
residential property apply.
Problem
Parties negotiating a transaction that is subject to SDLT will
have to agree the value that is to be apportioned to the
residential and non residential components. With differential rates
of SDLT, this puts the parties on a potential collision course,
which is unlikely to have been anticipated when the Chancellor
stood up to deliver his Budget speech on Wednesday.
A seller will want a high value attributed in the contract to the
principal house and curtilage if this will qualify for principal
private residence relief as it will reduce the seller's capital
gains tax exposure. In contrast, the buyer will want as low a value
as possible attributed to the principal house and a tight
definition of curtilage as this will minimise the additional 1%
SDLT that will apply from 6 April of next year.
Where the subject of a transaction is a rural estate with a mixture
of commercial property, agricultural land, woodland and six or more
residential properties, the rate of SDLT should remain unaffected
by the proposed changes. If there are fewer residential properties
there could be an issue.
Commentary
For selling agents, these difficulties may have a bearing on how
best to lot a sale. A seller will, in any event, want to retain the
right to determine the apportionment of the sale price to ensure
that his capital gains tax exposure is minimised; this will need to
be negotiated as a term within the sale contract.
This means that, so far as a buyer is concerned, agreeing the
apportionment of the purchase price will become an essential part
of the initial negotiation process between agents. Buying agents
would be advised to consider this apportionment in their offer
letters for mixed use properties.
For any transaction where substantial performance (the date of
completion or the date of payment of over 90% of the purchase
price) is to take place after 5 April 2011, there should be an
agreed apportionment of the price between the residential and non
residential components in the heads of terms. This can be imported
into the sale contract and will avoid any problems arising at an
advanced stage of the transaction.
All of this should be considered in the knowledge that HMRC will
look at a transaction in the round and may amend or even ignore
apportionment if they do not consider them to be a 'just and
reasonable' reflection of true value.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
