Stamp Duty Land Tax implications for companies purchasing residential property

Everyone knows and understands that the purpose of tax is to raise money for the state so that the state can pay for its various obligations and policies. However, taxation has another purpose too and that is to deter or modify behaviours that the Government regards as contrary to its policies or inimical to the public interest.

One such case is the special rates of Stamp Duty Land Tax (SDLT) for companies.

A note of warning here: this article is based on the law as of September 2022. Since then, the government has been in something of a state of flux with various ministers coming and going. It is, therefore, possible that the SDLT provisions may change.

What is SDLT?

SDLT is a tax that must be paid by someone when they purchase land, a property, or an interest in land and it is calculated as a percentage of the value of the transaction. However, not all buyers are treated the same when it comes to SDLT on residential properties, as companies are subject to different rules than individuals. In short, companies have to pay a higher rate (3%) of SDLT and a top rate, paid on residential properties over £500,000, of 15%. Any company controlled by a non-UK resident pays an even higher rate of 17%.

So, for example, the SDLT on a property sold for £1,000,000 for a UK-controlled company would come to £150,000 and for a non-UK resident controlled company, £170,000.

For the purposes of SDLT, the term ‘residential property’ means any land or buildings used as a dwelling, suitable for use as a dwelling, or in the process of being constructed or adapted for use as a dwelling. Provided a property meets any one of these three separate criteria, it will be treated as residential property, as will any garden or grounds belonging to it. Broadly speaking, a dwelling is a building or part of a building that contains the facilities necessary for day-to-day domestic existence (e.g., bathroom, kitchen and living room) and has a sufficient degree of privacy from other dwellings. It must be stressed that these provisions do not apply to commercial property.

The higher SDLT rates apply to all companies that buy residential properties, but there are some very important exemptions.

The higher SDLT exemptions

There are very important exemptions to the higher SDLT charges available to companies when they acquire residential property. The higher SDLT will not apply when:

• The property is used in or as part of a property rental business
• The property has been acquired by a property developer or trader
• The property is to be used in a trade involved in making the property available to the public
• The property is acquired by a financial institution in the course of lending
• The property is occupied by an employee of the purchaser
• The property is a farmhouse
• The property is bought by a qualified housing co-operative

The exemptions that are most likely to be relied upon are the first two, i.e., when the property is to be let, developed for re-sale or traded. This serves as an interesting insight into the public policy purpose that the higher SDLT regime was enacted to achieve.

The public policy objectives

By introducing the higher SDLT rates regime, the government was aiming to deter two types of activities which they felt were causing, or at least contributing, to much higher property and land prices. There is another clue in the fact that the rules distinguish between companies which are owned or controlled by UK residents and companies which are owned or controlled by non-residents.

For the former group, it deters the practice of buying up large swathes of land in a practice known as “land banking”. Instead of developing this land for rent or sale, it is simply held or ‘banked’ until such time as the market price goes up sufficiently. Obviously, it is a practice that removes a lot of potential new homes from the market.

In respect of the latter group, the government is aiming to deter wealthy non-UK residents from “parking” their money in the UK by purchasing property, often at the high end of the market, and simply letting it stand empty. They have no intention of living at the property or developing or letting it. Rather they are simply using it as a store of wealth, as the UK property market is seen as a very secure investment.

However, the government did not intend to make things more difficult for genuine builders, landlords and property developers and, hence, the exemptions that were carved out to ensure that those legitimate and useful market activities were not affected and that SDLT for developers was not punitive.

For further information and trusted legal advice regarding residential property matters, get in touch with our property lawyers in London at Carlsons Solicitors.