THE rules can favour investors, says Heather M Nisbet
Just so you know whether or not you want to read on, I’m talking about Land and Buildings Transaction Tax (the new Scottish stamp duty on property), the Annual Tax on Enveloped Dwellings (a UK-wide tax) and Multiple Dwellings Relief (as applied to LBTT).
With any tax change, there are usually winners and losers. The unfortunates, in terms of LBTT as it applies to houses and flats, are those who buy for more than £333,000. This is the level above which the charge to LBTT for residential property in Scotland exceeds the Stamp Duty Land Tax or SDLT charge that used to apply before LBTT was brought in on 1 April 2015.
The higher the price rises above £333,000, the greater the divergence becomes. This is because the 10 per cent and 12 per cent LBTT rates kick in at £325,001 and £750,001 respectively – whereas the corresponding SDLT rates only trigger at £925,001 and £1.5m.
So the buyer of a £450,000 Scottish house would pay £18,350 in LBTT, whereas the SDLT charge, if the house was in England, would be £12,500. Going higher up, the LBTT charge for an £800,000 Scottish house would be £54,350, compared with an SDLT charge of £30,000.
Buyers are always interested in ways to minimise the tax that they have to pay. In the past, some purchasers of expensive houses took title in the name of a company set up and controlled by them. The title would be in the company’s name but the house would be lived in by the controlling individual.
This was done so that when the house was sold, the individual would sell the shares in the title holding company, rather than having the company sell the house. A significant tax saving could be achieved by structuring the deal in this way: the purchase would not be subject to SDLT or LBTT (as it was not a purchase of a property) but instead would be subject to stamp duty on the sale of shares, at only 0.5 per cent.
It’s fair to say that this hasn’t been done too often in Scotland – it was something seen most frequently in London and other parts of the south of England.
To discourage this practice, the UK Government brought in a new tax in 2013, known as the ATED (or the annual tax on enveloped dwellings, ie the title is enveloped in the name of a company – sometimes also known as the title being held in a corporate wrapper). If it applies, there is a tax charge, every year, which is a percentage of the value of the house. The lowest value to which the ATED currently applies is over £1m. For a house worth between £1m and £2m, the annual tax is £7,000. However, the tax will also apply to properties that are worth between £500,000 and £1m. Anyone with an enveloped title to such a property will have to pay an annual tax charge of £3,500. (Valuations are taken as at 1 April 2012 but there are revaluations every 5 years after that date.)
I’m conscious that I’ve been the bearer of bad news so far. So let me counterbalance with some good news – for those buying more than one house or flat at a time. This might be, for example, a property investor, including student accommodation provider, buying a block of flats to let out. The normal rules would link the purchases together so there would only be one nil rate band and the total price would be used to work out the LBTT.
Such aggregation would push the price into the upper rate bands, resulting in a much higher charge to LBTT than would apply if the various properties were bought in unconnected deals. This is where my final acronym features.
Multiple dwellings relief or MDR is available to anyone who buys two or more houses or flats in one deal or connected deals. It allows the buyer to pay LBTT based on the average price per property rather than on the aggregate price, subject to a minimum charge equal to 25 per cent of the LBTT that would apply in the absence of this relief. And even better news for those who acquire six or more dwellings together is that the 25 per cent floor is based on commercial property rates (whose maximum is 4.5 per cent) rather than residential rates.
• Heather M Nisbet is a professional support lawyer with Morton Fraser www.morton-fraser.com