Stamp Duty Tax: Changes proposed

Just before becoming Prime Minister, Boris Johnson proposed Stamp Duty Land Tax (SDLT) should be liable by the buyer not the seller of a property.  We review this scenario in detail and consider who, if anyone bar the taxman, would benefit from such a change to the property market.

Currently, where a property is purchased the buyer is liable to pay any SDLT due on the purchase.  The premise to Johnson's proposed changes suggests that SDLT imposes additional cost on the buyer which acts as barrier to entering the property market as a first time buyer or rising up the property ladder when selling up and moving on.  Instead, by making the seller liable for SDLT rather than the buyer, first time buyers do not have to pay SDLT, giving rise to an increase in number of first time buyers and those moving up the property ladder, who only pay SDLT on the value of the property they are selling and not the property they are buying, but which has the effect of a higher tax bill.Consider those who are downsizing also. 

These sellers will pay more SDLT than they would under the current system as they will be paying SDLT on the higher value property, in other words the property they are selling rather than the property they are buying or even perhaps paying SDLT when they may not even acquire a property.  In theory, this should not be an issue as the downsizing seller is releasing equity in the sale of their current property but this hardly seems fair to sellers.If Boris Johnson's suggested proposal were to play out, it would remove the need for first-time buyers' relief, a tax benefit currently in place for first time buyers and therefore, anyone buying their first property, will pay no SDLT because they will not be selling a property.

So how will this work in practice and will it have the desired effect of making it easier for people to enter the property market?

The property market is governed on the principles of supply and demand where sellers are looking for the maximum amount they can get based on their property valuation and buyers are limited by the maximum they want to spend, or can afford to pay.  In each case, the seller and buyer are considering their position after taking into account their costs of sale and purchase – one of the most significant costs being SDLT. 

The effect that the cost of SDLT has on pricing and the ability to purchase a property underlies the additional three per cent charge for additional properties and the proposed one per cent charge for non-residents.Looking first from the seller's perspective, let's consider a seller, currently selling a property where they want to retain £500,000.  If the seller has to pay the SDLT on the sale, they will calculate the SDLT on a property sold for £500,000 at £15,000.  Therefore they will now want to charge £515,000 in order to obtain their desired selling price.  However, the SDLT on a property sold for £515,000 will actually be £15,750, so this is an increase of SDLT of £750 and would leave the seller with only £499,250 in their pocket - quite a difference!Looking at it from the buyer's perspective, consider a buyer who has a budget of £515,000, which includes SDLT costs, to spend on a property. 

Currently, the buyer would pay £500,000 to the seller and £15,000 to HMRC.  But if the law changes where the seller pays the SDLT instead of the buyer, when the buyer pays his full budget of £515,000 towards the purchase of his new home, £499,250 will be paid to the seller and £15,750 to HMRC!Therefore, in both scenarios - current and suggested scenario - either the buyer or seller loses out, or they could end up splitting the cost between them. 

And more interestingly, the only one who does well is HMRC, who take more taxes either way.  You could therefore argue that if the proposed changes go ahead, the SDLT rate will be increased, as well as the change in party culpable of paying up.  A measure therefore supposedly intended to help buyers buy into the market will have had the reverse effect by increasing the costs of purchase further down the line.

Added to this, where there is uncertainty as to the SDLT treatment, as discussed above,  sellers behaviours will likely shift to playing safe and budgeting in for higher costs because of the additional SDLT charge, which could push house prices up – to the detriment of buyers.  Furthermore, lenders are likely to reduce the loan to value they are prepared to lend to make sure there are enough proceeds of sale available to fully repay the loan after HMRC has been repaid.  This could mean that instead of having to find the funds to pay for SDLT they may have to save for a bigger deposit instead as their loan to value ratio will be reduced.

What next?

The suggested changes have only been discussed in relation to residential property and indeed the proposed changes are intended to focus on the residential market.  However, in practice, some property purchase transactions, there are questions as to whether the purchase should be treated as residential or non-residential.  For example where property is being bought with adjoining land there may be arguments with HMRC as to whether the additional land is "grounds" of the main dwelling or non-residential – allowing the non-residential rates to be used (on the basis of the purchase being a mixed use transaction). Similarly, where more than six properties are being purchased in a single transaction, the purchase may be treated as non-residential or, alternatively, the buyer may treat the purchase as residential and claim multiple dwellings relief.  So, having liability switch between buyer and seller, depending on such issues is likely to be very difficult in practice to apply.

What are your thoughts on the proposed changes? We would love to hear from you.

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