Posted on 8 February 2016 by
Ray Boulger has written John Charcol's response to the Treasury's consultation on proposed SDLT rates. Here's the response in full:
We applaud the Government’s aim of promoting home ownership, which we agree provides an excellent basis for providing economic security for people at every stage of their life. In particular we recognise that this is increasingly important not only for individuals but also for the state as, on average, people live longer and spend longer in retirement.
However, based on our long experience of advising first time buyers (FTBs), and others, we believe imposing a 3% SDLT surcharge on Buy to Let investors and second home purchasers will have a negligible impact on increasing the ability of FTBs to buy a property, but have what we suspect are unintended consequences.
Most properties bought by second homeowners would not be considered by FTBs. Although many properties bought by investors to let out might also be suitable for FTBs such purchases are only economically viable because of the demand from tenants, who, just like FTBs, need a home.
A properly functioning market would have an adequate supply of properties to buy or rent but until such a situation is achieved any proposal aimed at restricting supply in the rental sector will inevitably, to the extent it is successful, result in less choice for tenants and higher rents. Having to pay more rent will make it even more difficult for tenants to save a deposit and the SDLT needed to buy their first home.
A better solution to encourage FTBs would be to address what the quarterly Building Societies Association Property Tracker survey (https://bsa.org.uk/media-centre/press-releases/barriers-to-home-ownership-fall-as-housing-market) always shows to be the biggest barrier to home ownership – finding funds for a deposit (and by implication the SDLT).
Mortgage lenders have traditionally priced their products up to a certain Loan to Value (LTV) in multiples of 5% but some out of the box thinking would allow more choice at the high LTV end of the market. For example a 97.5% LTV mortgage, either using the Help to Buy equity share second charge mortgage scheme or on a commercial basis, would halve the deposit needed to buy a property and allow many more potential FTBs access to the market.
As an example the LTV of a 97.5% LTV 25 year repayment mortgage with an interest rate of 5% would fall to 95% after only 15 months, assuming no change in the property value. An FTB without adequate deposit funds will still not be able to buy any property this SDLT surcharge dissuades an investor from buying, whereas addressing the root cause of most potential FTBs’ frustration would transform their ability to move into home ownership.
Some aspects of these proposals are so badly thought through that they have the opposite effect to that intended. For example, in order to satisfy the more onerous affordability requirements imposed in the Mortgage Market Review it is not uncommon for us to advise an FTB whose income is insufficient to satisfy a lender but whose parents are willing to help to buy the property on a tenants in common basis with a parent owning 1% and the child 99%. As the mortgage is a joint and several liability lenders will then take both incomes into account. As guarantor mortgages have almost disappeared from the market at high LTVs this way of taking into account a parent’s income when necessary has largely replaced the guarantor mortgage.
At the other end of the life cycle these proposals will also affect a purchase, perhaps for their final home, where children either purchase a property for their elderly parents or purchase it jointly with their parents on a tenants in common bases. Lenders’ ageism policies contribute to the reasons why buying a property in this way is sometimes the only, or best, way forward.
We believe there needs to be greater clarity in these proposals and that at the very least there should be further exemptions to mitigate unfairness and to increase consistency with other government objectives. This email commenting on a blog post typifies one aspect of the unfairness:
We are a married couple with children. We sold our house 3 years ago and moved into a rental property - the idea was to be a cash buyer when we eventually saw the kind of house in the area we wish to buy in - virtually essential in our area to be the selected buyer for any house that comes on sale - it is that kind of market!! This has proved extremely difficult, as there is an extreme shortage of housing stock in our city centre close to the school. Instead of getting virtually nothing for our cash in the bank, we invested a small portion of it in two buy to let houses so that at least we could get some return to offset against our rental costs. In the meantime house prices have soared in our area (incidental of course but it makes us feel bad). We now have seen a house we'd like to buy and can just about afford it without selling our two tiny houses in a much cheaper part of Britain. The new house will be our main residence - but we sold our last house 3 years ago. Will we have to buy a 3% surcharge to buy this new house? It seems so unfair.
This couple made their plans in good faith, based on the then tax rules, and unless the current proposals are modified will become what in another context the Government would call “collateral damage.” As the policy intention appears to be not to charge the 3% surcharge when buying a main residence, even if the purchaser(s) owns 100s of other properties, we suggest introducing a simple amendment making it clear that providing the tests for a main residence specified in the consultation document are met the 3% surcharge will not be payable. This would also avoid HMRC having to set up a mechanism to refund the tax on occasions when a purchase precedes a sale.
We believe that the changes in tax relief on Buy to Let (BTL) investments announced in the last budget will have a significant impact on the market, especially in the higher risk sector of the market, as it will be the highly geared investor who will be most impacted.
These income tax changes will not only reduce the number of new BTL purchases but will also result in some investors selling, thus releasing stock which will be available for FTBs.
Q1: Are there any difficult circumstances involving family breakdown which mean that treating married couples and civil partners as one unit until they are separated is not appropriate? If there are, how would you suggest those circumstances are treated?
If a couple own a property jointly and subsequently separate but one party stays in the property it is common, particularly when the couple have children who will also remain in the property, for the property to remain in both names, not least because the mortgage lender will often refuse to release the departing party from the mortgage, because the remaining single income will often be insufficient to satisfy its affordability calculation. The proposals will unfairly affect the departing party if they purchase a property, as they will have to pay the increased SDLT on a property that will be their main residence.
Q2: Do you agree that, where property is purchased jointly, if any of the purchasers in a transaction are purchasing an additional residential property and not replacing a main residence, the higher rates should apply to the whole transaction value? If not, how would you suggest the government treats joint purchasers?
No. We believe it is unfair to charge any additional SDLT if any of the joint purchasers is not replacing a main residence. If one party is now acquiring a new main residence with another party acquiring their first main residence, additional SDLT should not be applied.
At the very minimum there should be an exemption for family assisted purchases, including children purchasing a property for, or jointly with, elderly parents. This could be effected by stipulating that if at least one of the joint purchasers will use the property as their main residence then the higher rates do not apply.
Q3: For the first stage of the test for determining whether a purchaser is replacing an only or main residence, does considering previously disposed of property in the way presented cause practical difficulties or hardship in particular cases?
Yes. We assumed the Government was opposed to retrospective taxation but imposing an 18 month rule on new buyers who have already sold their previous main residence more is exactly that. For example, an individual who has already sold their main residence, but this was more than 18 months ago, and moved to rented accommodation in order to be in a stronger position when negotiating a purchase in what is currently a seller’s market, but separately owns a buy-to-let property, would be penalised if they now purchase a property to be used as their main residence.
As suggested in our initial comments, as the policy intention appears to be not to impose the 3% surcharge when buying a main residence, even if the purchaser(s) owns 100s of other properties, we suggest a simple amendment making it clear that providing the tests for a main residence specified in the consultation document are met the 3% surcharge will not be payable.
Likewise, it is unfair to penalise a buyer who has never owned a main residence but owns rental properties and is now ready to purchase a main residence.
Q4: For the second stage of the test, do you agree that the rule should require the purchaser to intend to use the newly purchased property as their only or main residence?
We agree that if there is more than one purchaser at least one purchaser should intend to use the newly purchased property as their main residence.
Q5: Do you agree that 18 months is a reasonable length of time to allow purchasers a period between sale of a previous main residence and purchase of a new main residence that allows someone to claim they are replacing their only or main residence and therefore not pay the higher rates of SDLT?
No. We can see no reason for any time limit. If our suggestion that the surcharge will not apply if the tests for a main residence, as specified in the consultation document, are met the question of a time limit becomes irrelevant.
Q6: Do you agree there should be a refund mechanism in place for those who sell their previous main residence up to 18 months after the purchase of a new main residence? Are there any other cases where a refund of the additional SDLT paid should be given?
A better solution would be to allow buyers should to defer the payment of the surcharge for up to 18 months, in order to allow for such temporary situations to unwind. Having to find an additional 3% at the time of purchase will impose additional cash flow constraints on buyers, which in many cases can only be met by obtaining a larger mortgage. This will often take the mortgage into the next LTV band, resulting in a higher mortgage rate, possibly for the whole mortgage term.
Q7: Can you suggest any other actions the government could take to mitigate the cash flow impact on those who only temporarily own two residential properties?
See response to question 6.
Q8: Are there any other situations regarding main residences which require further consideration?
Some people working away from home choose to buy a property to stay in during the week, often financed with the help of an allowance from the employer, rather than rent or stay in a hotel. Penalising such purchases may have an impact on job mobility.
Q9: Would there be a benefit to a significant number of purchasers if the test for whether someone owns one, or more than one, residential properties, were undertaken at the time of submitting the SDLT return, rather than at the end of the day of the transaction?
This would benefit some purchasers and so should be adopted. In addition the timescale to complete the SDLT return should remain at 30 days, instead of reducing to 14 days. As we suspect most solicitors pay the SDLT within 14 days already the cash flow benefit to the Treasury of shortening the maximum period will be minimal but for purchasers undertaking non-simultaneous transactions leaving the maximum period at 30 days will provide more opportunity to complete their sale within the required timeframe. See also our response to Question 6.
Q10: Do you agree with the government’s proposed approach to considering property owned anywhere in the world when determining whether the higher rates of SDLT will be due?
We question the practicality of policing such an approach, but note this would be best answered by solicitors who would be ultimately be responsible for this. A better test would be whether the borrower intends to live in the property as their main residence in the UK.
Q11: Do you agree with the proposed treatment of furnished holiday lets?
Q12: Are there any other cases which the government should consider?
Q13: Do you agree that an exemption should be available to individual investors as well as all non-natural persons? Alternatively, is there evidence to suggest any exemption should be limited to only certain types of purchaser? If so, which types of purchaser?
Any exemptions should be available to individual investors as well as non-natural persons.
Q14: Do you think that either the bulk purchase of at least 15 residential properties or a portfolio test where a purchaser must own at least 15 residential properties are appropriate criteria for the exemption? Which would be better targeted?
We have seen no evidence supporting a threshold of 15 properties and in terms of the effect on the market can see no logic in this approach. It is difficult to see what difference there is on market impact between 3 investors owning 5 properties each or one investor owning 15.
Creating a policy that favours large businesses is anti-competitive and directly contradicts Government policy of supporting new businesses and entrepreneurs. Every investor with even one BTL investment is operating a small business and such businesses should be encouraged, not marginalised. If the government wishes to further professionalise the landlord sector then better enforcement of the requirements already in place would be more appropriate, resulting in better outcomes for tenants.
Q15: Are there better alternative or additional tests that could be used to better target an exemption and fulfil the government’s wider housing objectives?
See answer to Question 14.
Q16: Are there any other issues or factors the government should take into account in designing an exemption from the higher rates?
Q17: Do any specific kinds of collective investment vehicle or other non-individuals need to be treated differently to companies?
Q18: Do you agree with the proposed treatment of trusts, including the higher rates of SDLT applying to trusts purchasing residential property except where a purchase is a first property or replacement of a main residence for a beneficiary?
Q19: Do you think that purchasers are more likely to give accurate answers to main residence questions if HMRC provides specific questions for the conveyancer to ask the purchaser?
Not necessarily, but having standard questions designed in conjunction with the Law Society, rather than leaving each solicitor to draft their own, would be sensible, and compatible with Law Society procedure for other forms used in conveyancing.
Q20: Would a formal declaration by the purchaser that the answers to any such questions are accurate help to increase compliance without creating undue burdens for conveyancers? How do you think such a declaration should work?
Q21: Besides normal publicly available guidance, are there any additional products that HMRC can provide to help purchasers understand what rates of tax they will be paying on a planned purchase?
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and neither Charcol Limited nor Ray Boulger will accept liability for them.