Are you considering staircasing? Do you know whether or not you’ll need to pay stamp duty (also known as stamp duty land tax or ‘SDLT’) on staircasing? Read on.
This is the second of three articles. 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.
In the first article we explained what homebuyers need to know about SDLT when buying a shared ownership home. This article covers what happens when owners of shared ownership homes staircase (purchase additional shares in their home). The final article will explain the SDLT charge that arises when selling a shared ownership home.
Do I have to pay SDLT on staircasing?
It depends… In our first SDLT article we explained options for people buying a new-build shared ownership home. In particular, whether to pay SDLT in one go upfront, or to pay in stages. Paying SDLT in one go upfront is referred to as making a ‘market value election’. Say you bought a new-build, and made a market value election, then there would be no further SDLT to pay on staircasing.
On the other hand, perhaps you bought a resale property… In that case, the answer depends on which option the original buyer chose. If they made a market value election, before selling their share to you, the benefit of the election ‘runs with the lease’. (So long as a statement is included within the lease itself to confirm the market value election). That means that you enjoy the same benefit even though you didn’t actually make the market value election yourself.
Unfortunately, a market value election can only be made when the property is first purchased, not on a re-sale of the property. You can’t select market value election on a re-sale shared ownership home if it wasn’t made originally.
Paying in stages: when do I start paying SDLT?
If you’re paying SDLT in stages, you’ll make your first payment when you buy the initial share – in other words when the lease is granted. No further SDLT is due unless and until you staircase over 80%. This includes, for example, where your premium is over £40,000.
Paying in stages: how much SDLT do I pay when I staircase over 80%?
Paying SDLT on staircasing is only relevant where:
- a market value election was not made, and
- the staircasing transaction results in the buyer owning more than 80% of the property.
To calculate the tax (assuming the lease was granted on or after 12 March 2008):
(i) Establish what you paid initially for your purchase and all previous staircasing transactions (if any);
(ii) Confirm how much you are paying for the next share to take it over 80%;
(iii) Add these amounts (above) to calculate how much you have paid for the property altogether (including any previous staircasing transactions);
(iv) Calculate the SDLT payable on the total at the rates in force at the date of the latest staircasing transaction;
(vi) Find a fraction of the SDLT. The relevant fraction is the amount paid for the latest staircasing transaction divided by the total amount paid.
Staircasing Stamp Duty – Example 1
Andy acquires a shared ownership lease of a new-build house for a term of 125 years in July 2019. He is unmarried and is not a first-time buyer.
Andy does not make a market value election. He pays £175,000 for a 50% share. The monthly rent is £438. The amount of SDLT payable initially is £1,000: (£125,000 @ 0%) + (£50,000 @ 2%). The net present value (calculation required by HMRC to determine the rental income of the lease over its lifetime) of the minimum rent does not exceed £125,000; hence, no SDLT is due on the rent.
Andy then staircases to 100%, paying £200,000. The amount of SDLT payable is based on the total amount paid for the lease and the staircasing transaction, £375,000 (£175,000 + £200,000). So first we work out what the SDLT due on £375,000 would be at the current rates (assuming there is no change in SDLT rates): this is £8,750. The first £125,000 of the £375,000 is taxed at 0%, the next £125,000 of the £375,000 is taxed at 2% and the final £125,000 of the £375,000 is taxed at 5%.
But only part of the £8,750 is payable – the part attributable to the staircasing transaction that resulted in Andy owning more than 80%. In Andy’s case it is £4,667. The relevant part is found by dividing the price paid for the relevant staircasing transaction by the total amount paid: (£200,000 / £375,000) x £8,750. This means that £4,667 of SDLT is payable on the staircasing transaction within 30 days of the transaction. (Note this is a different deadline to the usual 14-day deadline for filing an SDLT return and paying SDLT.)
Check your lease date
Slightly different rules apply if the lease was granted before 12 March 2008.
Staircasing more than once over 80%
Staircasing more than once over 80% may mean paying further SDLT on the previous chargeable staircasing transaction(s), see below.
Staircasing above 80% on sale of the property
No SDLT is generally payable on staircasing above 80% in conjunction with a sale of the property. This will be explained in the third article.
Staircasing Stamp Duty – Example 2
As for Example 1, but this time Andy staircases twice, initially to 75% paying £90,000 and then to 100% paying £110,000.
No SDLT is payable on the first staircasing transaction, as it does not result in Andy owning more than 80%. The amount of SDLT payable on the second staircasing transaction is based on the total amount paid for the lease and the two staircasing transactions, £375,000 (£175,000 + £90,000 + £110,000).
So first we work out what the SDLT due on £375,000 would be at the current rates (assuming there is no change in SDLT rates): this is £8,750, as for Example 1. But only part of the £8,750 is payable – the part attributable to the staircasing transaction that resulted in Andy owning more than 80%. In Andy’s case it is £2,566. The relevant part is found by dividing the price paid for the relevant staircasing transaction by the total amount paid: (£110,000 / £375,000) x £8,750. This means that £2,566 of SDLT is payable on the second staircasing transaction within 30 days of the transaction.
Staircasing Stamp Duty – Example 3
As for Example 1, but this time Andy is a first-time buyer.
He pays no SDLT on the grant of the lease because the amount paid (£175,000) is below £300,000 (the nil-rate band threshold when first-time buyer relief is clamed). And if the net present value of the rent had exceeded £125,000, then the relief would have exempted the charge on rent too.
When Andy staircases, the tax is calculated as in Example 1 and Example 2. He cannot claim first-time buyer relief on staircasing and his prior claim for the relief is irrelevant when calculating the SDLT due on staircasing.
What if I staircase more than once above 80%?
For the first staircasing transaction over 80%, see the answer immediately above. For any further staircasing transactions, the same steps need to be followed: find the SDLT payable on the total amount paid using the rates in force at the relevant date and find the fraction of the SDLT attributable to the staircasing transaction. The SDLT paid on any earlier chargeable staircasing transactions needs to be reviewed and any further SDLT chargeable needs to be paid.
Staircasing Stamp Duty – Example 4
As for Example 1, except Andy staircases twice (having paid the initial purchase price of £175,000): once to 85% paying £125,000 and again to 100% paying £55,000.
The amount of SDLT payable on the first staircasing transaction is based on the total amount paid for the lease and the first staircasing transaction, £300,000 (£175,000 + £125,000). The SDLT due on £300,000 (assume that there is no change in SDLT rates*) is £5,000. The first £125,000 of the £300,000 is taxed at 0%, the next £125,000 of the £300,000 is taxed at 2% and the final £50,000 of the £300,000 is taxed at 5%.
The part of the £5,000 payable on the first staircasing transaction is £2,083: (£125,000 / £300,000) x £5,000. This means that £2,083 of SDLT is payable on the first staircasing transaction within 30 days of the transaction.
The amount of SDLT payable on the second staircasing transaction is based on the total amount paid for the lease and the two staircasing transactions, £355,000 (£175,000 + £125,000 + £55,000). The SDLT due on £355,000 (assuming there is no change in SDLT rates) is £7,750. The first £125,000 of the £355,000 is taxed at 0%, the next £125,000 of the £375,000 is taxed at 2% and the final £105,000 of the £355,000 is taxed at 5%. The part of the £7,750 payable on the second staircasing transaction is £1,200: (£55,000 / £355,000) x £7,750. This means that £1,200 of SDLT is payable on the second staircasing transaction within 30 days of the transaction.
The SDLT due on the first staircasing transaction now needs to be reviewed. The part of the £7,750 payable on the first staircasing transaction is now £2,728: (£125,000 / £355,000) x £7,750. As only £2,083 was paid on the first staircasing transaction, a further £645 needs to be paid (£2,728 – £2,083).
If SDLT was paid on the rent because the net present value of the rent exceeded £125,000, the buyer cannot reclaim SDLT on the rent when they staircase to 100%. It is irrelevant that the amount of rent payable reduces or the lease ends on staircasing. In other words, the SDLT on the net present value of the rent is calculated based on the assumption that the rent will be payable for the term of the lease. The rent reduction or lease termination consequential on staircasing does not entitle the buyer to a repayment of the SDLT on rent.
First-time buyer relief is available if the amount initially paid does not exceed £500,000 (see above). Again, the relief must be claimed in the SDLT return. If the buyer staircases, it is irrelevant that more than £300,000 (the threshold for the nil rate band) or £500,000 (the absolute threshold for the relief) is paid in total: the relief is not withdrawn.
Do I need to inform HMRC when I staircase?
If you haven’t made a market value election, AND you are staircasing above 80%, you must inform HMRC via an SDLT return. But staircasing below or up to 80% is not notifiable, even if the amount paid is above £125,000 (the SDLT nil rate threshold).
How do I tell HMRC about a staircasing transaction?
In theory, SDLT is a self-assessed tax. But don’t worry! Your solicitor will complete a SDLT return for you.
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: There are no HMRC codes specific to staircasing transactions. The return must be completed as if an existing lease of the property is bought for the purchase price save that the transaction will be ‘linked’ to the initial purchase of the lease and any earlier staircasing transactions. It will not, therefore, be obvious from the SDLT return that the return relates to a staircasing transaction and it would be prudent to send HMRC a short explanatory letter.
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