There aren't many areas of the UK tax code which have been targeted more by the Treasury in the last few years than the residential property sector. In order to discourage company ownership of owner occupied homes, in 2012/13 the Treasury introduced the flat 15% SDLT rate, Annual Tax on Enveloped Dwellings ("ATED") and ATED-related CGT, which are a complex set of rules.
More recently, CGT for non-residents generally investing in residential property has been introduced, and the new - and more expensive at the high end - "slice" system of SDLT was introduced in December 2014 with a top rate of 12%.
The most recent development has been the introduction of the so-called "higher rates" of SDLT for residential property, which will take effect from 1 April 2016. This will increase the rate of SDLT on each "slice" by 3% where it applies.
The 3% charge will generally catch individuals buying second homes, where they are not replacing their main home. And companies and discretionary trusts will usually be caught if they are buying residential properties.
The impact will naturally be felt hardest at the top end of the market, with a rate of 15% SDLT now applying to the "slice" of the price over £1.5m if the higher rates are relevant. But it is not just high net worth individuals who have been hit by this unexpected change. In an example of not-quite-joined-up–thinking, whilst the Government is actively encouraging investment into the private rented sector (PRS) to assist with the housing crisis on the one hand, the higher rates make it less attractive to investors on the other.
Whilst an investor in PRS may still be able to account for SDLT based on the average unit price if it acquires a residential portfolio (by claiming multiple dwellings relief), the SDLT is still significantly higher than it was. The suggestion in the original consultation document that there may be relief for those acquiring 15 or more properties, has not materialised. Some are still hoping however that the Government could have a change of heart before the Finance Bill receives Royal Assent.
Those investing in larger scale PRS are therefore examining their structures thoroughly, and in some cases looking to acquire properties at an earlier stage before any buildings have been built, so that the SDLT bites on a lower value. Care needs to be taken, however, to ensure that all taxes are considered carefully. For example, acquiring an undeveloped site upfront may make SDLT sense, but if this brings with it an irrecoverable VAT charge, then it may not solve the problem.
One small olive branch is that properties providing student accommodation do not appear to be within the higher rates, although one must still consider the structure of each transaction carefully.