Higher rate Stamp Duty Land Tax and Alternative Finance Transactions.

30th November 2016

The Government has announced it intends to amend the rules for the higher rates of stamp duty land tax (SDLT). The amendment applies to individuals funding purchases under an Alternative Finance Transaction.

The amendment to the rules will be made at the first possible opportunity and will be backdated to 1 April 2016. This document explains the effect of the amendment that will be introduced and what purchasers should do if they are making purchases now.

SDLT relief is available where alternative finance transactions lead to there being additional transactions compared to a purchase using mortgage finance.

Ordinarily in an alternative finance funded purchase there will be a first transaction which is the purchase of the property by a financial institution from the vendor. There will then be a second transaction which is either a further sale to or lease by the financial institution to the ultimate purchaser. In the case of a lease there may be a subsequent sale back to the ultimate purchaser. Under a purchase funded by a mortgage, there would be one transaction only.

The SDLT relief for alternative finance transactions applies to the second (and subsequent) transaction only, leaving SDLT chargeable on the purchase by the financial institution.

Under the rules for the new higher rates of SDLT announced on 16 March 2016, the financial institution (as a corporate body) would be liable to the higher rates of SDLT if the property purchased was purchased for more than £40,000 and it was not a reversionary interest in respect of a 21-year or longer lease. This would be the case regardless of the situation of the ultimate purchaser of the property (the purchaser in respect of the second transaction).

The Government has stated that it wasn’t it’s intention that the higher rates should affect those purchasing using alternative finance transactions any more than other purchasers.

They have stated that amendment to the rules will be made at the first possible opportunity and will be backdated to 1 April 2016.

HMRC’s approach (until the amendment becomes law)
An amendment to the Finance Bill clause in respect of the higher rates of SDLT will not become law until Royal Assent to the Finance Bill when it becomes an Act of Parliament. In the meantime, the existing rules will continue to have statutory effect granted under section 1(2) of Provisional Collection of Taxes Act 1968.

As the Government has indicated that the amendment will be given retrospective effect to remove some transactions from the charge to higher rates, HMRC has decided that affected purchasers should file their land transaction returns on the basis of the changes indicated above. HMRC won’t take action to amend or correct returns that it receives on that basis whilst the change to the law is in progress, avoiding the need to make repayments of overpaid tax following Royal Assent to an amendment.

However, in the unlikely event that the anticipated retrospective amendment weren’t to be made or didn’t provide for the treatment set out in this technical note, HMRC would take the necessary steps to collect the SDLT due.

The changes planned
The Government plans to introduce an amendment which will apply to the purchase by the corporate financial institution where the subsequent transactions are exempted from SDLT under the rules outlined above and will have the following effect.
In determining whether the higher rates apply to a transaction the tests (paragraphs 3 to 7 of schedule 4ZA as inserted) will apply as if the purchaser under the first transaction was the person ultimately buying the property (the purchaser in respect of the second transaction) rather than the corporate financial institution. Where a purchaser under the second transaction is an individual, this will mean that a purchase of a single dwelling will only be liable to the higher rates if the following apply:

  • the individual owns another property at the end of the day of the effective date of the transaction
  • the purchase is not a replacement of the individual’s previous only or main residence

The Government intends that the amendment will be backdated to have effect from 1 April 2016.
In all other respects the financial institution will be treated as the purchaser, including retaining responsibility for filing and payment of the land transaction return and making any amendments to the land transaction return. In particular, if the person ultimately buying the property sells a previous main residence and the transaction ceases to be a higher rates transaction (paragraph 3(7) Schedule 4ZA Finance Act 2003 as inserted) then only the financial institution will be able to make an amendment to claim a refund of the overpaid tax.

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