If buying your new home means a large estate in the countryside with several acres of land, you would expect to pay a lot of stamp duty land tax (SDLT) given that the rates on residential property now go as high as 15%.
But some curious anomalies in the SDLT legislation mean that if your country estate comes with farmland, or has cottages within the grounds or the wider land being acquired, there can be opportunities for some quite dramatic SDLT savings.
You may be aware of the “second home surcharge”, introduced in April 2016, which increases the rates of SDLT by 3% when you buy an additional residential property. The surcharge doesn’t normally apply where the new property is to be used as your main home and replaces your old main residence.
How the surcharge works: an example
Imagine you are looking to purchase a large house in the country to replace your current residence; the sale particulars inform you that your £10 million also gets you a cottage and 50 acres of land.
This is a purchase of two residences. Following completion you will own two residential properties and in the first instance fall within the 3% surcharge, giving a weighty SDLT bill of £1,413,750.
You may think that calculating SDLT on each property separately would mean that the 3% surcharge only need be applied to one of the two properties. But the purchase is treated as a single transaction and HMRC has confirmed that the surcharge either applies to the whole of a transaction or to none of it.
However, it seems unfair that you are suffering the “second home surcharge” when the property will be your only home. Happily the government agreed and introduced a special exemption.
Where a property purchase includes one principal residential property and any number of “subsidiary dwellings”, it should be treated as the purchase of one residential property for the purposes of the 3% surcharge.
Qualifying for exemption
To qualify for this exemption, the subsidiary dwelling(s) must be within the garden or grounds of the principal residence, and the principal residence along with its garden and grounds must represent at least two-thirds of the total purchase price.
In our example, it is very likely that the cottage would be within the grounds of the house, and would be worth less than £3,333,333 so the 3% surcharge would not apply to the purchase. This would save £300,000 of SDLT compared to paying the 3% surcharge.
Multiple dwellings relief: making dramatic reductions
Another relief which can also help to dramatically reduce the SDLT bill is multiple dwellings relief (MDR). This is simple to calculate:
- Divide total price by the number of dwellings being purchased and then calculate the SDLT charge on this average dwelling price;
- Multiply the “average” SDLT charge by the number of properties to arrive at the SDLT liability.
In our example, MDR would save £86,250 of SDLT (see below).
Getting the best of both worlds
Wouldn’t it be brilliant if you could claim the subsidiary dwelling exemption and MDR? Well, you can. This reduces the SDLT bill in our example by a whopping £386,250 compared to claiming neither relief.
Although this may seem counterintuitive, HMRC have confirmed the position in their guidance on the new rules (at paragraphs 10.2B and 10.2D).
Use of the land
Another factor to consider is whether any of the land is used for non-residential purposes, such as agricultural land, or happens to include a shop or office buildings. If so, the purchase is one of a mix of residential and non-residential property.
Such “mixed” transactions are subject to the non-residential rates of SDLT rather than the residential rates. HMRC have confirmed that this is the case even where the transaction includes the purchase of a second home. If the non-residential rates apply then the 3% surcharge cannot.
So if the 50 acres include a few fields of arable land then the whole purchase becomes a non-residential purchase. In our example, the SDLT due under the non-residential rates is £538,000 less than the residential rate, even if the subsidiary dwelling exemption and MDR are both claimed.
However, this may not be the case on smaller purchases. For example, if the price were £2 million then the SDLT would actually be £2,000 higher under the non-residential rates than the residential rates if MDR and the subsidiary dwelling exemption were claimed.
Nevertheless, if for some reason the subsidiary dwelling exemption could not be claimed (for instance if the value of principal property was not two-thirds of the total, or one of the cottages could not be said to be within the grounds of the principal property), then the non-residential rate would save you £58,000.
When cottages count
If the land included a row of three cottages which were let out to tenants, this would not count as non-residential land. However, provided the conditions for the subsidiary exemption were met, the 3% surcharge would not apply and you could still claim MDR. The fact that the cottages are let doesn’t seem to stop the 3% surcharge exemption from applying, even though this is supposed to be an exemption for main homes.
If the land included a row of ten cottages, there is another rule which says that the purchase of six or more dwellings in one transaction is treated as non-residential. So here you would be able to apply the non-residential rates. Again it doesn’t matter if the cottages are let out or not.
For the town mice amongst you, it’s worth knowing that MDR is also available on properties with a self-contained “granny flat” – but only if it is capable of independent occupation i.e. if has separate access and facilities.
Also, the purchase of a shop with a flat above would be a mixed transaction and therefore subject to the non-residential rates and outside the scope of the second home surcharge.
SDLT due on the example: £10 million purchase price, one main house, one cottage, 50 acres
3% surcharge applies: £1,413,750
Subsidiary dwelling condition met: £1,113,750
3% surcharge applies but MDR is claimed: £1,327,500
Subsidiary dwelling condition met and MDR is claimed: £1,027,500
Non-residential rates apply: £489,500
If you are considering a property purchase, our experience with the tax issues surrounding estates and land ownership means we can provide expert guidance.
For information, please get in touch via your usual BKL contact or use our enquiry form.