Stamp duty land tax (‘SDLT’) is complicated. But it’s essential for homebuyers and shared owners to have some understanding of the options available. Making informed choices could potentially save quite a lot of money.
This is the first of three articles. It explains what homebuyers need to know about shared ownership SDLT. The second article will cover what happens when owners of shared ownership homes staircase (purchase additional shares in their home). And the final article will explain the SDLT charge that arises when selling a shared ownership home.
HMRC’s guidance in this area is under review. The comments made in these articles are based on our understanding of HMRC practice. Solicitors should consider seeking specialist advice or making a request to HMRC for confirmation of their view of the legislation where appropriate.
All three articles were written by Sean Randall, in collaboration with Zahrah Aullybocus. Sean is a stamp duty expert and partner at Blick Rothenberg. Zahrah is a specialist consultant solicitor (and Shared Ownership Resources sponsor).
Do I have to pay stamp duty on a shared ownership home?
It depends…. HMRC charge SDLT at a nil rate when the total value of a residential property is below £250,000 (unless the higher rates for purchasing an ‘additional’ dwelling apply). However, if this applies to you, and you don’t need to pay SDLT, your solicitor will still need to submit a SDLT return if the purchase price is over £40,000.
Bear in mind that rules are regularly updated, so any examples given below may go out of date. Ask your solicitor to explain HMRC’s SDLT thresholds and rates at the time of your purchase.
What are my options if I have to pay SDLT?
If you buy a home through an approved shared ownership scheme, you must decide whether to pay SDLT:
- in one go (on the full market value), or
- in stages (so just pay on the price you are buying for).
Paying SDLT in one go
If you decide to pay SDLT in one go, this is called ‘making a Full Market Value election’. You’ll make a single upfront payment as if you’d bought a leasehold or freehold property outright. Consequently, your SDLT will be based on the current 100% market value of the property. This will be specified in your lease.
First-time buyers paying SDLT in one go are entitled to full relief (zero SDLT) on up to £425,000 or partial relief between £425,000 and £625,000. The relief is lost entirely if the price is over £625,000.
40% share purchased for £206,000
Full market value of £515,000
If you’re not a first-time buyer, you won’t qualify for any exemptions. First-time buyer means a person who has never owned a property before here, or anywhere else in the world. The word “buyer” is therefore misleading. Someone who, say, inherits a property is not a first-time buyer even if they no longer own the inherited property.
SDLT is calculated on a tiered basis. The current rates of SDLT can be found on HMRC’s website: https://www.gov.uk/stamp-duty-land-tax/residential-property-rates
Essentially, if you qualify as a first-time buyer:
- The first £425,000 of your transaction will be SDLT free.
- If you are buying for between £425,001 and £625,000, the relevant amount over £425,000 would be taxed at 5%.
- The first £250,000 is tax free.
- The second tranche between £250,001 to £925,000 is taxed at a rate of 5% on the balance above £250,000. More rates and bands apply for slices of the price above £925,000.
Using the worked example above SDLT would be calculated as follows:
|Not a First-Time Buyer
|Full Market Value Election
(Payable on £515,000)
|£0 – £250,000 (£250,000 taxed at 0%)
£250,001 – £515,000 (£265,000 taxed at 5%)
|£0 – £425,000 (£425,000 taxed at 0%)
£425,001 to £515,000 (£90,000 taxed at 5%)
|On Price Paid Only
(Final calculation will depend on rent being included in the calculation, but gives you an indication of likely SDLT)
|£0 – £250,000 (£206,000 taxed at 0%)
|£0 – £425,000 (£206,000 taxed at 0%)
If you make a market value election SDLT won’t be charged on the rent (see in a moment). Additionally, you won’t have to pay any further SDLT if you decide to buy more shares, or when you sell. Equally, if you don’t make a market value election and are a first-time buyer, SDLT won’t be charged on the rent.
How do I make a market value election?
Your solicitor should ask you which option you would like to select: a market value election or paying in stages. In your lease, the two options may look like this. Though bear in mind that older leases will be set out differently and/or have different terms.
Option A (Purchaser to Pay SDLT on 100% Value of Property):
- For the purposes of paragraph 4 of Schedule 9 of the Finance Act 2003 the Landlord and the Leaseholder confirm that the premium obtainable on the open market for the Premises (by reference to which the Premium is calculated) is the Initial Market Value and the minimum rent payable is the Minimum Rent and that the Leaseholder intends Stamp Duty Land Tax to be charged in accordance with the said paragraph 4 of Schedule 9 by reference to the Initial Market Value and the Minimum Rent.
Option B (Purchaser To Only Pay SDLT On % Share Being Purchased)
- The Landlord and the Leaseholder hereby confirm that the Initial Percentage is less than 80% as specified in paragraph 4A(2)(b) of Schedule 9 of the Finance Act 2003 and that the Leaseholder hereby confirms that they intend Stamp Duty Land Tax to be charged in accordance with paragraph 4A of Schedule 9 of the Finance Act 2003.
Make sure you’re clear about the pros and cons of each option before informing your solicitor which option you’ve chosen. Ask your solicitor if necessary.
If you choose the 100% market value election, then your solicitor will record this in your Stamp Duty Land Tax return, as well as in the lease. In theory, SDLT is a self-assessed tax. But don’t worry! Your solicitor will complete the return for you as the certificate generated by the ‘return’ is required to register the property at the Land Registry. You will need to approve the return by either signing a copy or confirming to your solicitor by email that the information in it is correct.
The SDLT return is particularly important where you’re purchasing your home with a mortgage. This is because your mortgage can’t be registered without a SDLT return.
(NOTE TO SOLICITORS: The HMRC SDLT return doesn’t easily allow recording of the election other than by entering the market value of the lease, rather than the price, as the consideration at Question 10 of the return. Consequently, Sean recommends sending HMRC a short letter to explain that the buyer has made a market value election in the return.)
Paying SDLT in stages
Although you have a choice whether to pay in one go or not, paying in stages is the default. In other words, failure to make the market value election will mean paying SDLT in stages.
In this case, the SDLT you pay is calculated on the market value of your initial % share. You might also need to pay additional SDLT on your rent if you are not a first-time buyer. This will be the case if the net present value of the minimum rent is over £250,000. (You’re probably asking yourself, what is ‘net present value (NPV) of rent’? NPV is the value – in today’s money – of future rent payments on shares still owned by the housing provider. The calculation takes into account estimated annual inflation in the future). Your solicitor will carry out this calculation and inform you how much SDLT you’ll need to pay. The rate of SDLT on rent is 1% on the NPV above £250,000.
Even if you buy more shares you won’t pay any more SDLT unless and until you staircase over 80%. We’ll cover this in the next feature: stamp duty and staircasing.
How do I choose whether to pay in one go, or in stages?
HMRC say: ‘You must decide if a market value election is your best option. It’s often best to do this when the total market value of the property is no more than the SDLT payment threshold.’ In that situation, a market value election would mean you’d benefit from zero SDLT on this particular property, now or in the future. (Zahrah recommends selecting this option if you qualify as a first-time buyer and the full market value is under £425,000.)
Your decision is more complicated if the total market value of the property is higher than the SDLT threshold. One advantage of paying SDLT upfront in one go is that the payment is done and dusted! On the other hand, you may find it too expensive to pay SDLT in one go upfront; even if it could cost you less over the longer-term than paying in stages.
How do I find out if I need to pay stamp duty on rent?
You will need to pay SDLT on rent when the net present value of your minimum rent payable over the lease term is over £250,000. You can check the net present value of your own minimum rent payable via HMRC’s online calculator.
Does it make any difference whether I’m buying a new-build or resale home?
If you buy a new-build home, it’s your decision whether to pay SDLT in one go, or in stages. However, a market value election can only be made on the grant of the lease (i.e. sale of a new build) and not on assignment of the lease (i.e. a resale).
This means that, if you’re purchasing a resale, you’re bound by the decision of the first purchaser. The good news… If the first purchaser made a market value election, the benefit ‘runs with the lease’ when it is sold on. So long as a market value election was made, and a statement is included within the lease itself to confirm, no further SDLT would be payable by you on staircasing over 80%.
Does it make any difference if my partner has their own property?
Yes. You might not own an ‘additional’ dwelling. But if you are married, or in a civil partnership with someone that does, HMRC treat you effectively as if you were ‘one’ person. You could therefore face a surcharge (this is an extra 3% payable in addition to any existing amount!). In some cases, you might be able to reclaim the surcharge. Make sure you discuss this with your solicitor.
If you are in the process of a divorce or separation please speak to your solicitor as there are yet more rules and exemptions that can be applied – it will need to be considered on a case-by-case basis.
I travel a lot for my job. Would that make a difference to my SDLT?
A 2% surcharge would apply if you have not been present in the UK for at least 183 days in the 12 months before completion. In some cases, you might be able to reclaim this surcharge. Make sure you discuss this with your solicitor.
Does it make any difference if there are equity caps on staircasing?
No. The rules set out above regardless of any caps on staircasing containing in the lease. Special SDLT treatment doesn’t apply.
Updated 11 October 2022 to reflect Government changes to SDLT.
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