All change: tax on land transactions
The last few months have seen something of a sea change in the way that property transactions are taxed.
Last December, stamp duty land tax (SDLT) on residential properties moved from a ‘slab’ basis to a ‘slice’ basis.
Under the slab basis, the top rate of tax set by the value of the property was applied to the whole value. The slice basis is more like most other taxes, so each tax rate just applies to the slice of value – not the whole value. The old slab basis was criticised for distorting the housing market. For example, someone buying a house for £250,001 would pay £5,000 more in SDLT than if they had paid a pound less at £250,000. The difference between these two prices is now just a few pence.
Scotland initially came up with the slice basis, only to be copied by the rest of the UK – but with lower rates. Scotland then lowered its own rates. Land and buildings transaction tax (LBTT) has replaced SDLT in Scotland from 1 April. Same tax rates, but different bands:
|Rest of UK
|Up to £125,000
||Up to £145,000
|£125,001 – £250,000
||£145,001 – £250,000
|£250,001 – £925,000
||£250,001 – £325,000
|£925,001 – £1,500,000
||£325,001 – £750,000
For example, if a house in England is purchased for £450,000, then the first £125,000 is exempt, the next £125,000 taxed at 2%, and the remaining £200,000 at 5% – a total of £12,500. LBTT on a similar Scottish property would be £18,350. The higher Scottish exempt band means that £400 less tax is paid on lower valued transactions, but more tax is due where values exceed £333,000.
Residential property leases of over 20 years generally do not exist in Scotland, so grants of residential leases are not subject to LBTT. In the rest of the UK, SDLT can potentially apply to both a premium and the present value of rental income.
A cut for most – an increase for some
The government estimates that it has cut SDLT for 98% of people purchasing property, but anyone buying a more expensive home – one costing over £937,500 – will pay more than previously. For expensive property, the cost is appreciably more – especially as the top rate outside Scotland has shot up from 7% to 12%.
There has been no change in the way that SDLT taxes commercial land transactions, with the slab basis still in use in most of the UK. LBTT in Scotland is again slice based, with rates being:
|Scotland – Commercial
|Up to £150,000
|£150,001 – £350,000
The treatment of commercial leases also differs, although the basic approach is the same – both taxes charge a rate of 1% on the net present value of rent over the term of a lease on the value exceeding £150,000.
For leases of over five years, SDLT takes the highest rent payable in the first five years and then applies it to the remaining years of the lease. LBTT instead uses the actual amount of rent payable over the lease term, using estimates as necessary. A revised return then has to be submitted to Revenue Scotland every third anniversary to ensure that LBTT reflects the rent actually paid. Any premium is taxed on the same basis as a freehold purchase.
Both taxes have similar reliefs, but sub-sale relief is an exception. SDLT sub-sale relief prevents a double charge where a property transaction happens in stages. There is no such across the board relief in Scotland, just a targeted relief for development transactions.
The differences between LBTT and SDLT are unlikely to sway a decision where to locate business premises, although the need to review LBTT leasehold transactions every three years increases the compliance burden. Be warned that the anti-avoidance rate of 15% charged where companies buy residential properties valued at over £500,000 still applies across the whole of the UK.
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