Stamp Duty Land Tax
21st June 2016
The answer to this question will in most cases be “no” but the reasoning is not straightforward and there are exceptions.
To find the answer it is necessary to look at schedule 4ZA to the Finance (2) Bill presented to Parliament following the Budget on 16 March 2016. This schedule is to be a new schedule to the Finance Act 2003. The specific provisions that need to be considered are mostly contained in Section 3 of that schedule, and came into force on 1 April 2016. Subject to certain transitional provisions, the new provisions have effect in relation to any land transaction of which the effective date is, or is after, 17 March 2016.
Lease extension and freehold house claims
Purchaser is an Individual
Individuals who buy a major interest in a single dwelling will pay the 3% surcharge if all of the following conditions are met:
- Condition A – the price is £40,000 or more.
- Condition B – the purchased dwelling is not subject to a lease upon which the main subject matter of the transaction is reversionary or is subject to such a lease but the lease has an unexpired term of no more than 21 years (for further consideration of this see below).
- Condition C – the purchaser has a major interest in a dwelling other than the one being purchased which has a market value of more than £40,000 and is not reversionary on a lease which has an unexpired term of more than 21 years (for further consideration on this see below).
- Condition D – the purchased dwelling is not a replacement for the purchaser’s only or main residence.
Conditions B and C are relevant to enfranchisement and are worth looking at in more detail.
The first part of Condition B states that the dwelling “is not subject to a lease upon which the main subject matter of the transaction is reversionary“. The main subject matter for an enfranchisement or lease extension claim is the reversionary interest in a property which is already held by the claimant under a long lease. Therefore this wording must refer specifically to enfranchisement type claims and it should be noted that it would also include voluntary transactions in respect of reversionary interests. Arguably at the point of completion of a lease extension claim as the new lease is granted in substitution for the old lease at that point the transaction ceases to be reversionary thereby failing the test. However it is contended that this is not what the wording means as up to the point the subject matter was “reversionary”.
The second part of Condition B is that the purchased dwelling “is subject to such a lease but the lease has an unexpired term of no more than 21 years“. The result of this is that if the reversionary lease is less than 21 years Condition B will be met and therefore the 3% surcharge is payable. In order to be exempt the long lease must have at least 21 years left to run and it appears the length of the lease should be calculated from the “effective date” which will be the completion date for the new lease. Therefore lessees making claims on relatively short leases will have met Condition B and, if they satisfy all other conditions, will have to pay the surcharge.
Condition C also refers to the interest in the dwelling not being the reversion on a lease with an unexpired term of more than 21 years. In other words if the other dwelling owned by the purchaser is itself a reversionary interest with more than 21 years left to run on the lease then that will not count as another dwelling and therefore the 3% surcharge will not apply. Conversely if the other interest held is a short term lease then it will count as another dwelling and the 3% surcharge applies.
Of course where the claimant is making a claim for their only or main residence the length of the lease is not relevant as the 3% surcharge will not apply (Condition D).
Purchaser is not an individual
In this case only Conditions A and B need to be met in order for the 3% surcharge to apply. In other words companies, trusts and other entities which do not count as individuals do not get an exemption for a first house that they own. Presumably this is on the basis that they are not capable of owning such a property as an only or main residence. The real test for companies and trusts will therefore be whether the enfranchised house or flat has an unexpired leasehold term of more or less than 21 years. If it is more than 21 years then the 3% surcharge will not apply but if it is less then the surcharge will apply.
Collective Enfranchisement Claims
The changes outlined above will not apply to the calculation of SDLT in relation to collective enfranchisement claims as those changes relate to a transaction consisting of a major interest in a single dwelling. However, there are further changes in paragraphs 5 to 7 of Schedule 4ZA which relate to ‘multiple dwelling transactions’.
These provisions apply to transactions where the main subject-matter of the transaction consists of a major interest in two or more dwellings. Taken together with the definition of dwelling in paragraph 17 of the schedule, it appears that where tenants buy the freehold reversion under the 1993 Act (or the 1987 Act for that matter), the multiple dwelling transactions rules will be engaged.
These rules bear some similarity to the single dwelling transaction rules in that they are dependent upon whether the purchaser is an individual or not an individual, although the exemption for an individual’s only or main residence is worked differently.
It should be noted that in very many collective enfranchisement claims the nominee purchaser will not be an individual.
Purchaser is an individual
Individuals who buy a major interest in two or more dwellings will pay the 3% surcharge if both of the following conditions are met in respect of two or more of the purchased dwellings:
- Condition A – the portion of the chargeable consideration for the transaction which is attributable on a ‘just and reasonable basis’ is £40,000 or more.
- Condition B – the purchased dwelling is not subject to a lease upon which the main subject matter of the transaction is reversionary or is subject to such a lease but the lease has an unexpired term of no more than 21 years (for further consideration of this see above).
Condition A differs to single dwelling transactions as it focuses on the ‘portion’ of the consideration attributable to any one particular dwelling. This is presumably to take account of section 74 of the Finance Act 2003, which provides for the division of the premium by reference to the number flats in respect of which the collective enfranchisement is being exercised.
Condition B is discussed above. However, in collective enfranchisement claims where the (nominee) purchaser is an individual, the unexpired terms in respect of two or more of the purchased dwellings must be less than 21 years for Condition B to be met. Therefore, collectives including claims on two or more relatively short leases will have met Condition B and, if they also satisfy Condition A, will have to pay the surcharge.
Individuals who buy a major interest in two or more dwellings, but in respect of which Conditions A and B are satisfied only in respect of one of the purchased dwellings will pay the 3% surcharge if:
- the purchaser has a major interest in a dwelling other than the one being purchased which has a market value of more than £40,000 and is not reversionary on a lease which has an unexpired term of more than 21 years (for further consideration of this see the commentary on Condition C above); and
- the purchased dwelling is not a replacement for the purchaser’s only or main residence (see Condition D above).
These provisions ensure the ‘first home’ exemption is applied even in a collective enfranchisement where the purchaser is an individual. Of course where all other conditions would be met in relation to one of the dwellings being purchased by the individual, but that dwelling is not in fact a replacement for the home, the ‘first home’ exemption does not apply and the 3% surcharge will be payable.
Purchaser is not an individual
Where the purchaser is not an individual, for the surcharge to be payable, Conditions A and B above only need be met in relation to at least one of the purchased dwellings. Again, this is presumably because companies and other entities that are not individuals do not get an exemption for the first house they own. Thus the focus for very many collective enfranchisement claims (where the nominee purchaser is not an individual) will be: first, on whether in relation to at least one of the flats (or ‘dwellings’) the tenant of such flat(s) will be required to pay £40,000 or more; and second, whether at least one of the enfranchised flats has an unexpired leasehold term of more or less than 21 years. If the proportion of the premium payable for at least one flat is £40,000 or more and the unexpired term is less than 21 years then the 3% surcharge will apply. Otherwise, the surcharge will not apply.
The changes outlined above should make no change to the calculation of SDLT in relation to many collective enfranchisement claims. The reason for this is that the relief given to groups of tenants exercising their collective enfranchisement right means that the total purchase price is split between the tenants and SDLT is calculated accordingly. In many cases this will result in the allocation to each tenant falling below the £40,000 mark and if it does then Condition A will not be met and the surcharge will not be payable. This applies equally to tenants exercising their right under Part 1 of the Landlord & Tenant Act 1987 (the right of first refusal).
Notices Served Before 26th November 2015
Where contracts were entered into for the purchase of a residential property on or before 25th November 2015 the 3% surcharge does not apply even if completion takes place on or after 1st April 2016. On the basis that a notice of claim under the Leasehold Reform Act 1967 or a notice under Section 42 of the Leasehold Reform Housing and Urban Development Act 1993 constitute a contract the surcharge should not apply where notice was served in those cases before that date. This would not however appear to apply to collective claims made under Section 13 of the 1993 Act on the basis that the transfer in that case is to be preceded by a contract and therefore the notice itself cannot constitute a contract.
It should be noted that special rules apply in respect of spouses and civil partners, settlements and bare trusts, partnerships and major interests in dwellings inherited jointly. These are all covered in Part 3 of Schedule 4ZA (paragraphs 8-17).
Written in partnership with Robert Barham, Pemberton Greenish.