Stamp duty on shared ownership homes will not be required until buyers own 80 per cent of the equity in their home (Budget Speech, March 2008)

Background

Shared ownership purchasers acquire a lease, for which they pay a premium representing a percentage of the market value of the property, and rent in respect of the remainder. They may be able to make further capital payments (which will increase their share and reduce the rent payable) and ultimately to acquire the freehold. This is known as 'staircasing'.

SDLT and Shared Ownership

  • Shared ownership purchasers can elect to pay SDLT at the outset on the market value of the property. In this case there will be no further SDLT charges at any stage.
  • If no election is made, SDLT will be charged on the initial purchase in the normal way – that is, on the premium and the net present value of the rent payable under the lease. (In practice it is very unlikely that any tax will be due on the rent.)
  • There is then a special SDLT relief which means staircasing payments are not charged to SDLT until an 80 percent share of the property is reached.
  • Any further 'staircasing' payments which take the purchaser above this level - including the acquisition of the freehold, will attract SDLT.

Budget Measure

  • The measure announced in the Budget abolishes, from Budget Day, the so called '£600 rule' for residential leases. This rule meant that, where the annual rent under the lease (not the NPV) exceeded £600, SDLT applied at 1 per cent on the premium even where this was below the SDLT threshold (£125,000, or £150,000 in a disadvantaged area).
  • The special rules for shared ownership purchasers have not changed, but in practice these purchasers were often hit by the £600 rule because their initial payment was below the threshold but their annual rent was more than £600.

Effect of the Measure for shared ownership purchasers

  • Where a market value election is not made, no SDLT will be payable on the premium where this does not exceed the SDLT threshold (£125,000, or £150,000 in a disadvantaged area), whatever the annual rent paid. If the premium is more than this, SDLT will still be charged on the whole premium at 1 per cent (and at higher rates in the unlikely event that the premium exceeds £250,000).
  • No tax will be payable on 'staircasing' payments which do not take the purchaser above an 80 per cent share of the property.
  • Any further 'staircasing' payments which take the purchaser above this level - including the acquisition of the freehold, will attract SDLT. Tax will be payable on the amount actually paid at the appropriate rate in force at the time the payment is made.
  • The rate of tax charged on these further 'staircasing' payments will be based on the total capital payments made to date – that is, on the initial premium and all 'staircasing' payments, regardless of whether any tax has previously been paid on them. This is because the various payments are treated as 'linked transactions' for SDLT purposes.

Example 1

Market value of the property is £220,000.

Initial lease premium is £110,000, representing a 50 per cent share of the property. SDLT payable is nil (because this amount is below the SDLT threshold).

First 'staircasing' payment is £55,000, taking the purchaser’s share to 75 per cent. SDLT payable is nil (this payment attracts relief as it doesn’t take the purchaser’s share over 80 per cent).

Final 'staircasing' payment is £55,000, taking the purchaser’s share to 100 per cent including acquisition of the freehold. SDLT is payable at 1 per cent on £55,000 (because the rate of SDLT is determined by the total of all payments made, that is £220,000).

Example 2

Market value of the property is £220,000.

Initial lease premium is £165,000, representing a 75 per cent share of the property. SDLT is payable at 1 per cent on £165,000 (because this amount is above the SDLT threshold).

Final staircasing payment is £55,000, taking the purchaser’s share to 100 per cent including acquisition of the freehold. SDLT is payable at 1 per cent on £55,000 (because the rate of SDLT is determined by the total of all payments made, that is £220,000).