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Joanna King

Land tax in shared ownership properties – and what’s new following the Autumn Budget 2018?

By Joanna King, Legal and Compliance Analyst, Ochresoft

The 2018 Autumn Budget has introduced changes to the First Time Buyer Relief on Stamp Duty Land Tax payments. The Relief now benefits more buyers who choose to purchase a property through a shared ownership scheme.

The shared ownership route is a practical alternative for buyers who otherwise would not be able to get on to the property ladder. Eligible buyers can purchase a share in their new home (between 25% and 75% of the home’s value) and pay rent on the share they don’t own. Later on, finances permitting, the buyers can purchase further shares in the property subject to the ‘staircasing’ provisions set out in the lease.

When a shared ownership lease is granted, the buyers can elect how they wish to pay the Stamp Duty Land Tax (in England and Northern Ireland) or Land Transaction Tax (in Wales). This can be approached in two ways – either by market value election or by paying in stages.

Market Value Election

The market value election applies when the buyer chooses to pay the respective land tax upfront on the full market value of the property, as if the entire interest in the property was acquired from the outset. The market value will usually be described in the lease as ‘Initial Market Value’.

If applicable, Stamp Duty Land Tax (SDLT) may also be due on the ‘Minimum Rent’ payable upon the acquisition of the reversion. Grants of residential leases, which are subject to the Land Transaction Tax (LTT), do not currently incur any duty on rent.

Where the lease includes the right to acquire the freehold reversion of the property, the land tax will be charged on the market value of the property with the freehold interest. No land tax will be payable in respect of the rent.

Most importantly, no additional duty will be payable when the homeowner chooses to buy further shares in the property in the future.

Payment in Stages

Payment in stages applies when the buyer prefers to pay the land tax only on the Premium, i.e. the value of the share they are initially buying. Depending on the amount of rent payable, additional SDLT on rent may be due. But there would be no LTT liability on rent for properties in Wales.

With this method buyers don’t have to make any further land tax payments until they own more than an 80% share of the property. Once their share in the Property goes over 80%, they will pay SDLT or LTT due on the transaction that took them over 80% and on any further transactions at the rate applicable at the time of the transaction(s).

SDLT First Time Buyer Relief, pre and post Autumn Budget 2018

Qualifying purchases by first time buyers in England and Northern Ireland may also be eligible for First Time Buyer Relief on Stamp Duty Land Tax.

When the SDLT First Time Buyer Relief was initially introduced in November last year, in qualifying shared ownership purchases first time buyers were only able to benefit from this Relief if they opted to pay SDLT under the market value election method.

With the Chancellor’s announcement on 29 October 2018, this Relief is now also available to qualifying first time buyers electing to pay the SDLT in stages.

The Relief has also been backdated to 22 November 2017 and qualifying purchasers, who completed on or after that date, can now apply to claim back any SDLT paid, which would not be due under the new rules.

The Relief is available where the market value of the shared ownership property does not exceed £500,000. No SDLT is due on the first £300,000 and the taxable value falling between £300,001 and £500,000 is subject to SDLT at 5% rate.

In addition, where the Relief is claimed, no SDLT will be payable on rent, regardless of whether the buyer makes the market value election or pays the SDLT in stages.

It is worth noting again that the First Time Buyer Relief does not apply to purchases of Welsh properties subject to the Land Transaction Tax (LTT).

Calculating the tax

The SDLT Calculator available on the GOV.UK website now includes a provision for calculating the tax on a purchase of a shared ownership property. You can choose between the market value election or payment in stages and you can apply the First Time Buyer Relief as well.

The Land Transaction Tax calculator on the Welsh Revenue Authority’s website is however limited in its scope and does not make any special provisions for shared ownership transactions.

Intelliworks case management system from Ochresoft enables you to easily manage your client’s shared ownership purchase. With the aid of prescribed workflow processes and document templates guiding you and your client through the land tax election, the software also takes care of the calculation of the correct amount of tax depending on the chosen method. You can therefore rest easy knowing that the right amount of tax has been automatically applied to the case, allowing you to collect it from the client before completion.

The land transaction return

The market value election is made in the land transaction return submitted in respect of the grant of the lease by showing the Initial Market Value as the consideration, or by amending that return changing the consideration to the Initial Market Value. The market value election cannot be withdrawn or amended once made.

The window for filing of the return and making the payment is currently 30 days after the effective date of the transaction for both the Stamp Duty Land Tax and the Land Transaction Tax.

However, from 1 March 2019 the time limit to file a Stamp Duty Land Tax return and pay the tax due will reduce from 30 days to 14 days. With Intelliworks’ automated tool for preparation and submission of your client’s SDLT return to HM Revenue & Customs, you can streamline your post-completion processes to meet this deadline.

Final points

Conveyancing practitioners also need to be mindful of the provisions relating to shared ownership purchases under the UK Finance Mortgage Lenders’ Handbook and in particular instructions under 5.14.3 and 5.19. Intelliworks software allows you to easily refer to relevant instructions for shared ownership properties applicable to your client’s specific lender. You can do it without having to leave the case to search online for relevant provisions in the Lenders’ Handbook. The information is sourced in real time, so you can be sure the Lenders’ Handbook content is always up to date.

With specialist workflows from Ochresoft, you can be certain that your client’s shared ownership transaction will be managed effectively and that your client will be well equipped to proceed with their purchase with confidence.

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