Enveloping property – have you budgeted for SDLT?
Property developers transferring residential property into the ownership of their company are often unaware of the need to pay Stamp Duty Land Tax (SDLT) and the higher rate for high value properties. Jo Morgan, Partner and Head of Commercial Property at Coodes Solicitors, outlines the issues.
Property developers are often advised to transfer properties from their personal ownership to that of the company. This is known as ‘enveloping’ and is usually as part of a wider tax planning exercise or for re-financing purposes. However, developers do not always take into consideration Stamp Duty Land Tax (SDLT) and the rate that is applied to high value property.
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Higher SDLT rates for additional dwellings
Since 1st April 2016, companies purchasing residential properties have faced higher SDLT rates for any additional dwellings. Essentially this is a 3% levy in addition to the residential SDLT rates. It applies whether or not this is the first property that the company has acquired and includes all company purchases of an interest in a single dwelling for £40,000 or over.
The 3% levy has been widely reported on and is generally well understood. However, many business owners are surprised to find that when a property is transferred from a connected vendor to a company entity for no value or for alternative consideration, SDLT can still apply.
Depending on the value of the property, this can cause cash flow issues if the business has not budgeted for this amount. S53 Finance Act 2003 imposes an SDLT liability where the vendor and company are connected or if there is other consideration involved, such as a transfer of shares. Partnerships can also be caught by this legislation. Unfortunately, this can mean that higher rates of SDLT can be triggered.
The 15% SDLT charge on high value properties
Developers should also be aware that if the company purchases a single dwelling for in excess of £500,000, the higher 15% SDLT charge can apply. In these circumstances, it is important to get advice on the viability of claiming an exemption. The 15% band can even apply to a single dwelling that costs more than £500,000 and forms part of a mixed used transaction purchase. Here, an exemption can be claimed in some circumstances, including when the dwelling is acquired for development and resale in the course of a qualifying property development trade or rental business.
Something to consider in advance with your lawyer is that, unfortunately, exemptions can be disapplied and clawbacks triggered. This can occur if the use of a property changes from the original use, which enabled the exemption, within a three year period.
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Annual Tax on Enveloped Dwellings
The SDLT liability for enveloping properties is in addition to another type of property tax, the Annual Tax on Enveloped Dwellings (ATED). The ATED is levied on dwellings in the UK valued at more than £500,000, and owned by a company, a partnership in which one partner is a company, or a collective investment scheme.
SDLT is a complex tax and it is important that your legal advisor is aware of potential liabilities that can arise in a company purchases or enveloping. Seeking early advice from a specialist is key so you are best placed to proceed with all of the necessary financials considered.