Stamp Duty Land Tax – An ever increasing burden

We’re nearing the end of August 2012, and recent reports suggest that house prices have on average fallen again in the last month. A trend that seems to have stretched back over the last 4 years or so, turning the once safe haven for investment, into a struggle to break even.

There are a handful of issues that are common amongst purchasers, negative equity, raising a deposit, and an amenable mortgage lender to name but a few, but Stamp Duty Land Tax (SDLT), a tax payable on residential and commercial purchases over the particular thresholds, is one that recently has made more of the headlines. Individuals transacting in property of all shapes, sizes and prices received unwelcome news following the Budget in March of this year.

Firstly, the ‘Stamp Duty Holiday’ for first time buyers came to an end. If you’re unfamiliar with the concept, it allowed first timers to purchase property of up to £250,000 without paying SDLT (a potential and much needed saving of up to £2,500). There were widespread calls for an extension but, with the Chancellor George Osborne citing that it had not been a success, it wasn’t to be.

In the months that followed the Budget, the Council of Mortgage Lenders announced that the number of mortgages lent specifically to first-time buyers had dropped significantly due to the policy ending, seeming to support a differing opinion to that of Mr Osborne.

At the same time as hitting those at the lower end of the property market, the Government introduced new legislation to impose greater SDLT on those purchasing the most expensive properties, affecting those at the other end of the scale. A 40% increase saw the rate of SDLT on those purchasing properties above £2m go from 5% to 7%. To put this into context, those affected would see at least an additional £40,000 SDLT disappearing from their bank accounts compared with the previous rate in force a day earlier.

SDLT operates under a method, widely seen as unfair and unlike any other tax, known as the ‘slab basis’. Unlike income tax, for example, which applies incrementally applying the different rates to income as it increases, SDLT is assessed on the whole consideration dependant on what band it falls within.  This is not only an extremely penal basis, but also takes effect by hugely influencing purchase prices around each of the particular bands. To demonstrate, a person selling a property reasonably valued at £1,015,000 is undoubtedly going to see most, if not all, offers coming in at £1,000,000 or lower by virtue of the fact that it’ll save the buyer £10k plus in SDLT alone.

It appears that it’s not just tax payers and advisors that see the current SDLT regime as unfair. The Scottish Government will be able to set the applicable rates of SDLT in Scotland from April 2015, and it has outlined a progressive tax regime rather than the current slab basis. Early predictions show that the changes to what would then be known as Land and Building Transaction Tax could save money for 95% of those buying property in Scotland.

Unsurprisingly, given all of the above, planning to save SDLT is becoming more and more popular amongst purchasers. As equally unsurprising, the popularity of such planning has drawn the attention of the Government, with The Budget 2012 introducing legislation that closed down certain forms of SDLT planning, as well as bringing in a 15% charge where companies was being utilised to avoid SDLT on residential property.

More recently we’ve also seen a consultation on how the government might change or remove the reliefs provided by the well utilised ‘Sub-Sale’ legislation to prevent planning opportunities from arising, clearly demonstrating that SDLT is firmly on their agenda.

This article has been provided by Craig Herbet, Partner of C3 Tax based in Leeds, Yorkshire, who offer tax advice.