Annexes and the 3% stamp duty land tax surcharge
Self-contained annexes included in the purchase of a house have now been removed from the Government’s recently introduced 3% stamp duty land tax (SDLT) surcharge on buying “additional residential property”, provided certain conditions are satisfied (and provided the surcharge does not apply for other reasons, for example, the purchaser already owns another house).
The problem that arose under the new SDLT surcharge rules in their original form, was that individuals buying a property that included a self-contained ‘’dwelling’’, say, a “granny flat” or separate cottage, might have been treated as purchasing two properties so as to fall within the new surcharge on the whole purchase price. This applies even where the buyer is replacing their main residence.
The Government has agreed that this was an unintended consequence of the new rules. Under their proposed amendment to the new SDLT surcharge if an “annex” is “subsidiary” to the main dwelling then the surcharge will not apply. The amendment takes effect from 1 April 2016 (to tie in with the 3% higher rate SDLT charge coming into force).
Under the amendment the annex (dwelling A) is “subsidiary” to the main property (dwelling B) only if the following conditions are met:
- dwelling A is in the grounds of, or in the same building as dwelling B; and
- the amount of the purchase price allocated on a “just and reasonable” basis to dwelling B is at least two-thirds of the whole purchase price.
- There is no definition of ‘’grounds’’ in this context, so it is not possible to conclude how widely this may be interpreted. Further clarification from the Revenue would be welcome.
- There are no criteria to determine what is a ‘’just and reasonable’ ’price apportionment between the main and subsidiary property or properties. A purchaser will need to be able to justify the price allocation if the Revenue raises an enquiry. In certain circumstances it will be prudent to obtain a formal valuation.
If the purchase includes several such annexes then provided they are all “subsidiary” to the main dwelling, and in particular provided the purchase price for the main dwelling is still at least two-thirds of the whole price, then the surcharge is again dis-applied.
For example, a house which includes a self-contained studio (annex) and a separate cottage in the grounds is bought for £2.5m. The purchaser owns no other property. Provided the proportion of the total price attributed on a just and reasonable basis to the main house is at least two thirds of £2.5m = £1.66m then the studio and cottage are treated as subsidiary and the 3% surcharge does not apply. (The buyer may be entitled to multiple dwellings relief as two or more properties are bought in a single transaction).
However, if the studio and cottage are valued at more than one third of the price i.e. £833,333 then the buyer would pay the 3% surcharge on the total price of £2.5m.
In the above example, even if the purchaser owns another property, provided he is replacing his main residence then the surcharge is dis-applied. The surcharge would of course apply if the purchaser owns another property and is not replacing his main residence.
It is important to note that the new rule on annexes does not make any difference in cases where the surcharge already applies for other reasons in particular where:
- the purchaser already owns, or has an interest in, any other residential property anywhere in the world which is not being replaced by the new purchase; or
- the purchaser is a company or a so-called discretionary trust (being a trust under which trustees have discretion to distribute income to the beneficiaries).
The amendment leaves some questions, including the following:
- Can multiple dwellings relief (MDR) still be claimed and if so at what rate? There appears to be no reason why MDR should not apply in cases where the new rules on subsidiary dwellings have the effect of dis-applying the 3% higher rate. MDR should still apply in such cases and because the transaction falls outside the higher rate, it will be applied at the standard rate.
- Can a purchaser claim a refund of the overpaid SDLT where the 3% higher rate has been paid on a purchase which includes an annex? This point has not been addressed. However, under the general self-assessment regime as it applies to SDLT, a purchaser can amend their SDLT return within 12 months of the filing date to reclaim any overpayment.
For further information on the application of the Higher Rate please see our previous Briefing Note: Mind the Traps! Complex New SDLT Rules.