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Stamp Duty on shared ownership property explained

Posted: 07/10/2022


While we always stress to our clients who sell shared ownership property that they should never give advice or guidance to customers on the complexities of Stamp Duty Land Tax (SDLT), we do believe it is helpful for sales professionals to have an understanding of shared ownership SDLT.

Accordingly, this article attempts to explain and clarify the current rules for the purchase of a shared ownership new build property or a shared ownership re-sale property. The SDLT requirements which apply on a re-sale of the property or when buying additional shares (known as ‘staircasing’) are also explained.

This note has been updated to take account of the so called ‘fiscal event’ held by the government’s Chancellor of the Exchequer on 23 September 2022.

SDLT overview

Stamp Duty Land Tax (SDLT) is a tax paid to HM Revenue and Customs (HMRC) when purchasing a property. Many buyers of shared ownership property will be first time buyers (ie none of the buyers will have ever owned a property anywhere in the world).

For first time buyers where the full market value (FMV) of the property is £625,000 or less, they should be able to claim first time buyer’s relief on the following basis: 0% on the first £425,000 and 5% on the remainder up to £625,000.

This is compared to standard SDLT rates as follows (ie without first time buyer’s relief):

Property or lease premium or transfer value

SDLT rate

Up to £250,000

Zero

The next £675,000 (the portion from £250,001 to £925,000)

5%

The next £575,000 (the portion from £925,001 to £1.5 million)

10%

The remaining amount (the portion above £1.5 million)

12%

SDLT for a shared ownership new build property

There are two options for paying SDLT on a new build shared ownership property. Buyers can either pay on the price they are paying for their share and the net present value of the rent (paying in stages) or pay on the FMV. Buyers may also be able to benefit from first time buyer’s relief provided they are a first time buyer and that the FMV of the property is £625,000 or less.

Paying on the share and the rent (also known as paying in stages)

If a buyer opts to pay on the share and the rent, they will pay SDLT on the actual price being paid to purchase a share in the property and may well have to pay SDLT on the specified rent, i.e. the rent paid to the landlord for the part of the property not owned by the buyer (particularly for a shared ownership property in London with a high value and low share purchase).

The payment on the rent is calculated based on the Net Present Value (NPV) of the lease. The simple explanation of NPV is the value of the rent over the life of the lease but it is more complicated that this (and too complex to explain in this article). HMRC does helpfully provide a calculator to enable this figure to be calculated and to save conveyancers from requiring a tax degree in addition to their legal qualifications!

If the FMV market value is £625,000 or less, a first time buyer will be able to claim first time buyer’s relief. This means that, if the share being purchased is less than £425,000, a buyer will not have to pay any SDLT whatsoever for their purchase. If it is between £425,000 - £625,000, buyers will have to pay SDLT either on the FMV or on the share and rent dependant on their circumstances.

If the FMV is over £625,000, then buyers cannot claim first time buyer’s relief even where the share they are buying is less than £425,000.

The downside to paying SDLT on the price and the rent is that buyers will be liable for further SDLT payments if they staircase above 80% ownership (which is explained in further detail later in this article).

Paying on the full market value (FMV) - also known as a market value election

If a buyer pays on the FMV of the property, they are making a market value election. This means that SDLT will be paid on the rates shown in the table above on the full value of the property. For example, if the purchaser is buying a 25% share for £125,000 in a property valued at £500,000 then, by making a market value election, SDLT is paid on the FMV of £500,000 (which would be £3,750 as a first time buyer or £12,500 for non-first time buyers).

When a buyer makes a market value election the positive outcome is that they will pay no further SDLT if and when they buy additional shares in the property.

So how do buyers decide what option to take? This will depend on their own circumstances and buyers should ensure that they speak to their specialist shared ownership conveyancer for advice on the different options. Although the conveyancer cannot make the decision they can inform buyers what the different options mean both now and in the future.

For example, all first time buyers who are purchasing a property with an FMV of less than £250,000 would be advised to claim the first time buyer’s relief and pay on the FMV as this means that no SDLT is payable now or on any future staircasing.

When a buyer considers their options they need to think about what may happen in the future. If they are purchasing a 25% share, are they likely to staircase to 100% ownership or more likely to re-sell before they are in a position to do this? If the latter, then they may be better off paying a lower SDLT payment now on the share and the rent as they will not personally benefit from paying SDLT on the FMV without staircasing to 100% ownership themselves.

The government appears to have created a gamble for shared ownership buyers of whether to pay all SDLT now and nothing later or risk paying a higher level of SDLT at a later date when staircasing (if at all).

SDLT for a shared ownership re-sale property

When purchasing a shared ownership re-sale property (ie an existing non-new build) SDLT is simply paid on the usual rates as shown in the table above for the actual price being paid for the property. The rent payable for the property is not relevant for SDLT purposes and neither is the FMV.

The only other consideration is to establish whether the first buyer of the property paid on the share and the rent or made a full market value election. If they only paid on the share and rent, this means that SDLT will be payable once a future owner staircases over 80% ownership. If the first buyer originally paid SDLT on the FMV, a future owner will benefit from not having to pay any SDLT for any subsequent staircasing transaction.

SDLT when selling a shared ownership property

When selling a shared ownership property, it may be that this is sold on the open market to someone who is buying the existing share in the property and staircasing to 100% ownership simultaneously. The landlord or the lease will often require that the seller (rather than the buyer) simultaneously staircases to 100% at the same time as selling their share to the new buyer.

However, if staircasing to 100% and simultaneously selling, there should be no liability to pay SDLT for this staircasing transaction as SDLT sub-sale relief can likely be claimed. An SDLT return will still need to be filed with HMRC but no SDLT is payable.

There are, unfortunately, many horror stories of sellers having to pay thousands of pounds in SDLT essentially to sell their property where sub-sale relief could have been claimed.

SDLT when buying additional shares (staircasing)

Staircasing is where a shared ownership leaseholder purchases additional shares in the property.

SDLT is not payable for any staircasing transaction up to 80% ownership and SDLT is also not payable where a market value election was made at the time of the original purchase.

If no market value election was made by the original buyer who, therefore, paid on the share and the rent, SDLT is payable once staircasing takes the leaseholder’s ownership over 80%.

This is where it gets horribly complicated but is briefly explained below:

  • SDLT is payable only when the staircasing exceeds an 80% share
  • The amount of SDLT payable is based at the current SDLT rates (possibly with the exception of any payment due for the first grant of the lease – see below)
  • SDLT is payable for any previous staircasing transactions (possibly including the first grant of the lease – see below)
  • If SDLT was paid on previous transactions (for example, if staircasing to 85% occurred) then additional SDLT could now be payable based on the current value. This is because all previous transactions are counted as linked transactions
  • SDLT is payable based on the totals paid but apportioned based on the premium for each share/total premium paid
  • SDLT (or additional SDLT) is payable for the initial grant of the lease on staircasing over 80% ownership only if the initial lease was granted before 12 March 2008. If it was granted after this date then it is not considered a linked transaction.
  • If SDLT is payable on the initial grant of the lease, this is paid on the SDLT rate at the time of the grant of the initial lease.

Once staircasing to 100% is achieved all SDLT shared ownership complications cease to exist for future transactions.

Summary

Although there is not enough space to fully explain SDLT on shared ownership or to provide worked examples, hopefully this article provides a brief explanation of the complications of SDLT in relation to shared ownership property and highlights the importance of ensuring that buyers use a conveyancer with plenty of experience and expertise in this area.

This article is intended as guidance only but should not be exclusively relied on and Penningtons Manches Cooper LLP accepts no liability for the contents of this article. Independent tax advice should be obtained where required.


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