- Residential developers: can buyers benefit from SDLT holiday on post-March completions?
Residential developers: can buyers benefit from SDLT holiday on post-March completions?
Residential developers: can buyers benefit from SDLT holiday on post-March completions?28th August 2020 - Published by Property team
Following the Chancellor’s Summer Statement in July this year, many of our developer clients have been approached by buyers of residential units with questions about the new rules for Stamp Duty Land Tax (SDLT) where the residential units in question will not be build complete until after the SDLT holiday comes to an end.
The government has temporarily increased the 0% band rate of SDLT on residential properties from £125,000 to £500,000. Previously, prospective buyers were to pay 2% SDLT on that portion of the purchase price between £125,000 and £250,000, and 5% on the portion between £250,000 to £500,000 (or 5% and 8% respectively if the higher rate of SDLT applied). This could mean a potential saving of up to £15,000.
It is possible that government will extend the holiday past 31st March 2021, but there are as yet no indications that they will do this.
Benefiting from the SDLT holiday on post-March 2021 completions
So what might a buyer do to try and benefit from the SDLT holiday if the property will not be physically ready in time? It all comes down to what is defined in the legislation as the effective date of the transaction, as this determines when liability to SDLT arises. Realistically there are two approaches they could take:
They could ask to complete the contract early
Generally, a contract for a completed residential unit is liable for SDLT on completion. Provided the completion takes place before the SDLT holiday comes to an end, the current SDLT rates will apply. Whilst it may seem unusual to complete on a transaction that hasn’t physically been constructed yet, we are aware of at least one development in Manchester that uses this model already and has done so before the SDLT holiday came into effect.
There are some practical considerations to be had; if the buyer is using mortgage finance to purchase, the agreement may have to defer payment of the purchase price until actual completion, and some lenders may refuse to lend at all in these circumstances.
It is also worth remembering that both parties become committed to the transaction at an earlier stage and if the purchaser subsequently decides to withdraw, it must transfer its legal interest back to the developer. This may cause a second SDLT charge to arise, which would be incurred by the developer.
They could substantially perform the contract
The effective date of a transaction can also be when the contract is substantially performed. Broadly speaking, substantial performance is the point at which:
- any payment of rent is made
- payment of substantially the whole of the purchase price
- the purchaser is entitled to possession of the property
Some form of rent is normally payable on completion, but the contract could be amended or varied to cause rent to be paid earlier, which would trigger substantial performance.
HMRC’s SDLT Manual defines substantially the whole of the purchase price as an amount equal to or greater than 90% of the total consideration due under the contract. Obviously this would only be an option for buyers who were cash buyers and who were willing to accept the associated risks with this option should the development fail.
The last bullet point is included for completeness as realistically occupying a property whilst development works are ongoing may be impractical and substantial performance could be difficult to prove on this basis. It is arguable as to whether a buyer can truly occupy a residential property that is essentially a building site and, as such, there may be more risk in establishing ‘substantial performance’ under this heading.
Substantially performing the contract has the advantage over completing the contract in that, should completion not ultimately take place, the transaction is deemed not to have happened and the buyer can approach HMRC for a refund. However, to take advantage of the SDLT holiday, the substantial performance must not have occurred before 8 July 2020.
It is important to remember that it is the buyer who is responsible for submitting a correct SDLT return and paying the correct amount of tax, but that HMRC may choose to look at the developer in the event of any enquiry into whether the correct amount of SDLT was paid.
Consideration should be given to the additional cost of both tax advice and the required changes to the documentation as against any potential saving and possible challenge by HMRC. Ideally, the buyer will have taken specialist tax advice and we would recommend that any developer who is approached by a buyer in respect of any of the arrangements outlined above also seek specialist advice.
Get in touch with a property solicitor in Manchester
Please get in touch with our property team to discuss any of these points by calling 0161 832 3434 or contact us here.