On 8 July 2020 the Chancellor announced a temporary Stamp Duty Land Tax (SDLT) holiday for purchases concluded by 31 March 2021.
Those who are at an advanced stage in the buying process are likely to be able to take advantage of the lower SDLT rates.
However, it is generally acknowledged that those who have instructed solicitors after 01 January 2020, time is running out for the new transactions to complete in time to take advantage of the Chancellor’s concession and that they will have to pay SDLT.
The increase in sales volume generated by the SDLT holiday has created a number of capability gaps. Solicitors and surveyors are fully committed; however, banks and local authorities are struggling with the reduced capacity due to the pandemic forcing home working as well as an increase in the number of applications. This slows down the process, increases stress and makes buyers less discerning and more likely to accept sub optimal deals in the race to meet the 31 March deadline.
Latest position as at 03 March 2021
On 03 March 2021, the chancellor announced that there will be an extension to the temporary SDLT holiday.
The Stamp Duty rates that came into effect on July 8 2020 were originally proposed to end on 31 March 2021. However, these rates will now remain in place until 30 June 2021.
There will also be a further tapered reduction of Stamp Duty rates. The nil-rate band of £500,000 will continue until the end of June, following which the nil-rate band will be adjusted to £250,000 from 30 June 2021 to 30 September 2021. From 01 October 2021, Stamp Duty will return to its previous levels with the nil-rate band set at £125,000.
Buyers purchasing a second home or a buy-to-let investment can still take advantage of the widened Stamp Duty bands during the temporary cuts. However, such buyers will still be obliged to pay the Stamp Duty surcharge of 3% (England and Northern Ireland) on each band.
The effective date for SDLT payments
HMRC’s SDLT Manual provides that the rate of SDLT payable is the rate in force on the “effective date” of a transaction.
Ordinarily, the effective date is the date of the property transaction completion i.e. when the contract is completed. An SDLT return must be submitted and any SDLT due must be paid within 14 days of the effective date.
How can a buyer bring forward an effective date?
Depending on the circumstances of each case, there may be a couple of options available to bring forward the effective date, but each option is less than ideal and brings about its own complications. These options may only be available for cash buyers and for those willing to take the associated risks. They are not for the feint hearted.
The two options:
- Complete a contract early; or
- Substantially perform the contract.
Completing the contract early
Where a property is not yet built or where a seller is in a chain and cannot move out by 31 March, you could consider completing the contract early and defer the payment of the purchase price until the actual handover of the property.
The issues that could potentially arise from completing the contract early are:
- If purchasing with a mortgage, some lenders may refuse to lend;
- If the purchaser subsequently decides to withdraw, it would have to transfer its legal interest back (providing it has this option reserved as a right in the contract and no contractual disputes arise) and this may cause a second SDLT charge to arise which would have to be paid by the seller;
- If the seller is currently occupying the property, the buyer would have to grant a licence to occupy and if the seller subsequently refuses to leave, the seller would have to start eviction proceedings in the courts.
Substantial performance of the contract
Where a contract is substantially performed the effective date will be the date of substantial performance, which is triggered by performance of the consideration specified in the contract. A contract may be deemed to be substantially performed if one of the following criteria are met:
- Substantial payment of the purchase price is made (i.e. more than 90% of the total consideration due under the contract);
- Any payment of rent is made;
- The purchaser is entitled to possession of the property (difficult for new builds but potentially.
There are no fixed requirements for substantial performance as this will differ in each transaction and it is for the buyer to establish substantial performance has occurred. HMRC can potentially challenge assumptions.
The advantage of substantial performance over completing the contract is that should the actual land transfer not occur, the transaction is deemed not to have happened and the buyer can request a refund from HMRC.
What happens when a contract is rescinded or annulled?
Where SDLT is paid upon substantial performance and the contract is rescinded or annulled later on, the purchaser may be able to claim a refund of the SDLT paid plus any interest incurred. If the purchaser is eligible for a refund of the SDLT paid then a claim would need to be made within 12 months of the filing date of the SDLT return.
Where a contract has been rescinded or annulled and you submit a claim for a refund of SDLT paid, Monarch Solicitors will not be held liable if you cannot reclaim back any SDLT paid.
What happens at legal completion?
Where a contract has been substantially performed, the actual transfer on completion will be a separate notifiable land transaction. Therefore, another SDLT return will need to be submitted at legal completion irrespective of whether any SDLT payment is due. If the SDLT payable at legal completion exceeds the amount at substantial performance than the deficit will need to be repaid within 14 days of legal completion. If the SDLT amount due at legal completion is lower, the SDLT paid at substantial performance cannot be reclaimed.
In the instance where the SDLT payable at legal completion exceeds the SDLT payable at substantial performance, you will need to pay the SDLT payment shortfall and Monarch Solicitors will not take any responsibility for the SDLT payable shortfall.
Weighing up costs against the benefits
Consideration should be given to the additional cost of both tax advice and the additional legal documentation required against any potential savings, and the risks of a challenge by HMRC and the risk of the seller not performing their part of the contract.
In addition, consideration should be given to market factors to. After the chancellor’s announcement of the SDLT holiday, the increased demand of property transactions has resulted in house price inflation beyond the normal range.
Under the current scheme, the maximum saving available is £15,000 for properties with a value of over £500,000. According to Nationwide Building Society, the average property sale price in England and Wales was £230,920 in December 2020, which would ordinarily mean that SDLT to be paid is £2,118, or less than 1% of the purchase price.
If the increased demand for property during the SDLT holiday causes property prices to increase by over 1%, the increase in property prices could exceed any costs savings associated to the SDLT holiday. Therefore, in reality the buyer could potentially end up having to pay more for a property purchase. Similarly, where a property price has increased by more than £15,000, rather than benefiting from the SDLT holiday the buyer would in fact be in a net loss position even if the full SDLT discount is applicable.
According to Right Move, property prices have fallen in the months prior to 9 January 2021. This may be correlated to a decrease of activity in the property market due to the realisation that any new property transactions may not be possible to complete before 31 March 2021.
It is predicted that from Spring onwards the property market will quieten down as a result of a number of factors such as the end of the SDLT holiday, the pandemic and the economic downturn. With this in mind, there may be a decline in property prices and as a result, there may be a shift in terms of bargaining power in favour of the buyers, which may result in more opportunities and bargains in the property market.
For the majority of people, buying a property represents the largest single financial transaction they will have to make in their lives, it is important to consider all the issues and risks and strike the right balance to make an informed decision before proceeding with any property transaction.
If you do choose to pay over 90% of the property purchase price before the legal completion date to benefit from the SDLT holiday, this will be at your own risk and discretion.
Monarch Solicitors shall not be liable if HMRC later challenge your submission and find that your actions do not constitute as substantial performance of the contract.
Monarch Solicitors are not tax specialists and so do not provide advice on tax. We recommend that you to take independent tax advice from a tax specialist, such as an accountant or financial advisor who has the appropriate indemnity insurance in place.
Although Monarch Solicitors will strive to legally complete your property purchase before 31 March 2021 there is no guarantee that this will be the case, due to the increase in demand and the delays caused by homeworking and COVID-19.
Monarch Solicitors shall not be liable if your property purchase attracts a higher rate of SDLT if it completes after the SDLT holiday.