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Stamp Duty Gap Year

Stamp Duty Gap Year
In a bid to reverse the downturn in the property market, the Chancellor of the Exchequer recently announced a stamp duty land tax `holiday’. The holiday provides a temporary exemption from stamp duty land tax for acquisitions of residential property worth £175,000 or less.

 

The theory is that by removing the stamp duty land tax charge associated with the cheapest properties, reluctant first time buyers with be persuaded to take the property market plunge.

 

The theory is that the stagnation caused by the dearth of first time buyers will lift and the effects of first time buyers re entering the market will filter up the chain, ultimately boosting all sectors of the market. Increased demand for properties as buyers rush to take advantage of the time-limited exemption will halt the downward trend on prices, helping the property market to recover.

 

The holiday from stamp duty is actually more of a gap year, applying acquisitions of residential property on or after 3 September 2008 and before 3 September 2009. The key date is the effective date of the land transaction, which is normally the date of completion of the purchase. It is therefore not enough to have exchanged contracts before 3 September 2009 – completion must also take place before this date for the exemption to be available.

 

Nature of stamp duty land tax

 

Stamp taxes are payable on transaction in land, property and shares. The tax that is payable will depend on the nature of the transaction. Stamp duty land tax replaced stamp duty from 1 December 2003.

 

Stamp duty land tax is a tax on transactions. When land or property is purchased, a land transaction return (SDLT1) must be completed and sent to HMRC. The form is normally completed by a solicitor or conveyancer as part of the conveyancing process. The form must be signed by the purchaser.

 

The rate at which stamp duty land tax is payable depends on the purchase of the property. Prior to 3 September 2008, the rates of stamp duty land tax for residential property were as follows:

 

Rate
Purchase price: residential property
 
zero
£0 to £125,000
 
1%
Over £125,000 to £250,000
 
3%
Over £250,000 to £500,000
 
4%
Over £500,000

 

Where the purchase price for a property falls in a particular band, the rate for that band applies to the whole of the purchase price. For example, a property with a purchase price of £250,000 would attract stamp duty land tax at a rate of one per cent, i.e. £2,500.

 

However, a property with a purchase price of £251,000 will attract stamp duty one the full £251,000 at a rate of three per cent, i.e. £7,530. Thus a £1,000 increase in the purchase price taking it over the £250,000 threshold, increases the stamp duty payable by £5,030.

 

Properties purchased in areas which are designated disadvantaged areas qualify for disadvantaged areas relief. This works by allowing properties in such areas to benefit from a higher zero rate threshold of £150,000, rather than the £125,000 zero rate threshold otherwise applying to residential property.

 

Application Of The Exemption

 

The exemption works by applying a new higher zero rate threshold of £175,000 to purchases of residential property on or after 3 September 2008 and before 3 September 2009. The other rates and thresholds are unchanged. Consequently the rates of stamp duty land tax applying during the `gap year’ are as follows:

 

Rate
 Purchase price: residential property
 
Zero
 £0 to £175,000
 
1%
 Over £175,000 to £250,000
 
3%
 Over £250,000 to £500,000
 
4%
 Over £500,000
 

Thus the exemption really only benefits those buying properties with a purchase price of between £125,000 and £175,000 as those purchasing properties costing £125,000 or less did not pay stamp duty land tax anyway. As a result of the exemption, a person buying a property costing £175,000 will save stamp duty of £1,750 if the transaction completes on or after 3 September 2008 and before 3 September 2009.

 

The threshold for disadvantages areas relief is unchanged at £150,000. As this is less than the £175,000 threshold applying for the `gap year’, disadvantaged areas relief is not in point for the duration of the exemption.

 

The exemption applies to anyone purchasing a property which does not cost more than £175,000 on or after 3 September 2008 and before 3 September 2009. It covers acquisitions of major interests in land, other than leases with less than 21 years to run or the assignment of leases with less than 21 years to run. The acquisition must consist entirely of residential property and the chargeable consideration must not exceed £175,000.

 

The application applies to leasehold residential properties provided that the lease has at least 21 years to run and the net present value of the rent is £175,000 or less. Short leases (less than 21 years) are excluded from the exemption as the government wishes to direct help towards those purchasing major interests in land rather than those leasing properties for short periods.

 

Although stamp duty land tax also applies to non-residential properties, application of the exemption is restricted to the acquisition of residential properties. For these purposes, a residential property is one that is used either as a dwelling, one which is suitable for use as a dwelling or one that is in the process of being converted into a dwelling at the time of purchase.

 

The definition also includes land forming the garden or grounds of such a dwelling up to the `permitted area’, which is normally 0.5 hectare.

 

The restriction of the exemption to residential property means that mixed-use property does not qualify. This means, for example, a property comprising a shop with a flat above it would not benefit from the exemption.

 

The exemption is time limited and only applies where the transaction is completed in the exemption window which runs from 3 September 2008 to 2 September 2009. The deadlines are fixed and completions that took place on 2 September 2008 or which take place on 3 September 2009 do not qualify.

 

The exemption cannot be claimed in conjunction with other exemptions and reliefs. As noted above, where a residential property is purchased in a disadvantaged area during the exemption window, the exemption threshold applies rather than the disadvantaged areas zero rate threshold as this is more beneficial. Likewise relief for zero carbon homes cannot be claimed in addition to the exemption.

 

Like other stamp duty land tax exemptions, the temporary exemption has an upper threshold and applies only to purchase with a value below the threshold. The exemption with the highest threshold takes precedence.

 

Where the exemption applies, purchasers still need to complete a SDLT1 return. This is to enable HMRC to verify claims for relief.

 

Is it enough?

 

Those thinking of purchasing a property in the £125,000 to £175,000 band will doubtless welcome the exemption and may indeed be persuaded to purchase a property before 3 September 2009. However, this is only a limited section of the property market and the measure will not help the majority of house buyers and sellers.

 

The current nature of stamp duty land tax is such that it places pressure on the market for properties to sell at a price just below a threshold as moving into the next band is extremely costly. As noted above, a £1,000 increase in the purchase price of a property from £250,000 to £251,000 increases the stamp duty land tax bill by £5,030.

 

Perhaps the time is ripe for stamp duty land tax reform. Adopting the income tax model and having bands taxable at different rates, rather than thresholds where rates apply to the whole price would help all buyers. Under this model, stamp duty would be payable at a zero rate on the first £175,000, at 1% on the next £75,000, at 3% on the next £100,000 and at 4% on the balance.

 

Arguably, reforming stamp duty land tax in this way will do far move to boost the housing market and the sectors of the economy whose fortunes are closely allied to the housing market than a limited exemption could ever hope to achieve.

 

Sarah Bradford