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SDLT 3% Surcharge for buy to let

This article is for general information only. Tax law is a highly specialised area and you should only act or refrain from acting after receiving full professional advice on the facts of your particular case. This article is for general information and does not constitute investment advice. Always consult an IFA.

The Autumn Statement is disappointing for buy to let investors in that the much hoped for abolition of the 3% stamp duty charge has not materialised. The Finance Bill 2017 will be published on 5th December 2016 and it will be interesting to see if it contains any amendments to the 3% SDLT surcharge.

Avoidance Schemes

There are various ways being discussed for avoiding the 3% surcharge, all of which have to be looked at with a very sceptical eye. The track record for such stamp duty savings schemes working in recent years has been poor and in many cases buyers using them have ended up being investigated by HMRC and paying penalties and interest. In addition they can only usually be used by cash buyers as mortgagees are unlikely to agree to any risk their charge over the property could be put at risk.

The “22 year lease” avoidance scheme

One suggested arrangement involves entering into leases over 21 years on the investor’s main home and on the investment property. These leases usually contain a “break clause” allowing the investor to end the leases after a short period.

The rules say that in order for the 3% tax to apply you must fulfil all the following criteria:-

  1. Pay over £40,000 for the property,
  1. The buy to let property is not subject to a lease of over 21 years to run on the date of purchase,
  1. The purchaser owns another house which is not subject to a lease of more than 21 years to run at the date of the purchase of the buy to let property,
  1. The property being purchased is not replacing the investor’s main residence.

The suggestion is that you enter into a 22 year lease on the buy to let property simultaneously with completion of the buy to let property with a break clause allowing you to terminate the lease on 7 days’ notice which you subsequently do. You could (on a belt and races approach) also do the same with your main home. The tenant could be a relative but the lease should be on an arm’s length commercial basis.

Does it work?

The schemes mainly try to take advantage of the fact that the wording of the legislation is capable of different interpretation e.g. as to when the 21 plus year lease must be entered into.

It probably does not work as very contrived and is artificial involving pre-ordained steps with no commercial basis. HMRC are likely to attack it. We would not recommend getting involved in such arrangements as it is likely to have an unhappy ending.

What could work?

The statutory lease exemption is there for a purpose. We can identify four situations in which it is likely to work.

  • If you purchase a property and the seller (i.e. not you as the buyer) has granted a long term lease to a tenant in the property and you take the property with the tenant in occupation and you cannot legally get vacant possession for over 21 years then you may be able to rely on this exemption. If you are able subsequently to say pay the tenant to vacate then this will not matter.
  • In some cases people are given the right to live in a property until they die (life tenants) or equity release occupiers. Here it may be possible to argue that the arrangements amount to a lease of over 21 years and you are exempt.
  • If you buy a reversion (say a ground rent) which has a lease of over 22 years then this should be exempt from the 3% charge.
  • The exemption could be useful to investors say in the West End of London buying a freehold subject to a “short lease” of over 21 years. If you own the lease of an investment property and then buy the freehold there should be no 3% surcharge on the purchase of the freehold as the rules do not distinguish whether you have the leasehold interest or a third party. You will be better off buying a high value freehold subject to a 22 year lease rather than a 20 year lease as with a 20 year lease you will be outside the exemption for 3% SDLT. This creates a trap for the valuation of such investment freeholds.

November 2016

David Anderson