Some early thoughts on last week’s SDLT changes

Tax on property: A magical mystery tour

Unusually, given the generally prevailing practice of extensively trailed tax reform, this year’s Autumn Statement contained a number of genuine surprises, and none more so than in the context of real estate. The abolition of the slab system for SDLT on residential transactions had not been widely anticipated. This announcement, together with an increase in the annual tax on enveloped dwellings (ATED) for residential properties, are significant and we are already seeing possible changes in behaviour. It certainly made for a hectic evening on 3 December, with heroic action required to prevent damage to a number of transactions.

Demise of the SDLT slab

In fact, the demise of the slab system was long overdue. Its effect was to charge SDLT at a single rate on the whole of the chargeable consideration for a transaction. It was an ancient and anachronistic inheritance from the previous stamp duty system. Inevitably, it resulted in some fairly wild pricing distortions towards the margins of the rate bands. For residential property and with effect from 4 December 2014, this is now replaced with a progressive system, more similar to the taxation of profits for income tax purposes.

For a government on the eve of a general election, the beauty of the reform is that it results in a decrease in the amount of SDLT payable for the vast majority of house purchases of the electorate (although we note an anomaly where the chargeable consideration is just over £1 million). By contrast, a small number of uber-wealthy (an apparently politically expedient demographic at this stage in the political cycle) will pay increases that are eye-watering (see the following table).

It is unfortunate that the government did not take this opportunity also to abolish the slab system for commercial property. The result in the context of mixed residential/commercial transactions is a rather cumbersome and unwieldy mismatch of provisions. Perhaps the abolition of the slab system for commercial property will come, since it is difficult to imagine that there is a policy distinction between the two sectors. It is likely that the political impetus that drove the reform of the residential sector did not extend also to the commercial sector. In the meantime we will have to brace ourselves for some possibly messy calculations.

ATED

The Annual Tax on Enveloped Dwellings (ATED), introduced by the Finance Act 2013, is an annual tax on high-value residential properties held by non-natural persons, such as companies. In policy terms, the intention behind the introduction of the legislation was plainly to dissuade taxpayers from holding residential property through companies. The threshold for “high-value” is currently £2 million, although this will be reduced for years going forward.

It was always envisaged that the annual chargeable amount for the ATED would be increased to keep pace with inflation. However, the Autumn Statement has increased the annual chargeable amount by 50% above inflation. We are told that ATED has, to date, raised five times more than predicted, so perhaps this is the cash-cow that will keep giving?

Just what is the policy?

Nonetheless the massive hike in SDLT rates in residential property at the very tip of the housing market may mean that buying enveloped residential property in a corporate entity becomes the attractive option, despite the increase in the ATED charge. Obviously it will be a decision that will depend on all of the facts, values and rates in any individual case, and the relevance of ATED will depend on the use to which the purchased property is put. Nonetheless, we have already seen a number of transactions where buying the company holding the expensive property is now back on the radar, despite the increased due diligence and risk that this can bring. So we might be bold enough to predict that this measure may ultimately collect less tax on high-end residential property than the previous regime.