Stamp duty land tax (‘SDLT’) can be one of the most complicated aspects of any property purchase. It is confusing to individuals and professionals alike. Different rates and land classifications only make matters worse and most purchasers have to rely on independent advice as to how much SDLT can rack up to.
If you are purchasing land and are just as confused about SDLT keep reading.
First of all, let’s look at how the HMRC classifies land. Most of us know two types: residential and commercial, but what about agricultural land or land that has both elements as residential and commercial properties (a ‘mixed use land’)? As far as the HMRC is concerned everything that is not purely residential is considered non-residential land.
You may be thinking why this is important and why should you consider this knowledge helpful. Well, the recent changes in multiple residential house ownership that brought about the 3% increase in SDLT really makes a difference. To illustrate, let’s say I have decided to become a landlord and just bought a second residential property to let for £250,000. A couple of years ago I would have paid £2,500 SDLT, but nowadays I would pay significantly more – in fact four times more – and my additional expenditure would result in my purse being another £10,000 lighter.
What happens if I suddenly realise that being a landlord is not my forte and decide that the second property I have purchased suits me and my needs more that my current residential house? If I then dispose of my first residential house (my main dwelling) within 3 years from the date I have purchased the second property, I could be eligible for a refund of the difference (£7,500). Three years, however, seems like a very short period of time considering that I would most likely need to renovate the second property first, then put it on the letting market, get some tenants in and then decide whether I can be a landlord long term. This, in addition to trying to sell my own residential house and generally trying to juggle all matters at once, will most likely cost me more nerves than the refund is worth.
Now, let’s compare the same scenario but if I were buying a plot of an agricultural land with a house for the same price. SDLT for this purchase would be only £2,000 – a bargain isn’t it? You now may be wondering what the reason for such difference would be, and the answer is simply in how the land is classified. Even if buying a plot of agricultural land containing a residential house would equate to me technically owning 2 residential houses, I would still pay non-residential rates because the land is considered ‘mixed-use’.
Non-residential property, in the eyes of HMRC, encompasses much more than just property used for business reasons.
However, Stamp Duty Land Tax is a complicated area with a lot of variables that could influence the amount you pay. You may be eligible to certain relief or exemptions on one hand but pay more on different transactions depending on the number of properties, the price etc.
It is always helpful to get legal advice on these type of matters, especially if SDLT is something that causes concern and may be a deterrent for you to invest in the property market. Here at Farleys our commercial department will be happy to look at your circumstances and ensure that you are informed about your options. Get in touch with us either by calling 0845 287 0939 or via our website enquiry form.