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Plans to stop Stamp Duty avoidance on £2m+ homes

The government has revealed details of its plans to levy an annual charge on high-value residential properties owned by companies, in a paper entitled “Ensuring the fair taxation of residential property transactions. ” This is part of a package of measures announced in the last budget designed to crack down on perceived avoidance of stamp duty land tax (SDLT) by some owners of high-value homes.

Not many people are likely to be too worried about this, as not many own such high-value homes. However Conveyancing Solicitors have seen a rise in the number of lower-value homes which are being bought in the name of a company owned by the buyer. So there is always the possibility of the charge being extended to lower-value properties in the future.

The proposal is to levy a yearly charge or tax on homes worth over £2 million which are ‘wrapped’ in corporate and other ‘envelopes’ i.e. owned by companies and other ‘non-natural’ persons.  

SDLT is charged on the transfer of a property title. But once a property is owned by a company, it can subsequently be sold by selling ownership of the company rather than transferring title to the property. This would be exempt from payment of SDLT, as there is no transfer of title since it remains owned by the same company.

Lower-value homes can of course be owned by companies and sold in the same way.  But buyers of such properties are less likely to be able to buy the company owning the property, and avoid SDLT, as they frequently require residential mortgages. Lenders then require the property title to be in the name of the borrowers, not a company. So most buyers will end up having to pay SDLT.

The government will levy a charge starting at £15, 000 a year for homes valued over £2m, rising in bands to £140, 000 for homes valued over £200m.

It is clearly intended that this annual charge will persuade individual owners who have ‘enveloped’ their property to ‘de-envelope’ it into their own name. However criticism has already been raised by property investment and development companies which own residential properties as part of their business, and would not be in a position to de-envelope.

Owners of leasehold apartments may also have some concerns. The charge will apply to leasehold property owned in the name of a company, but will also apparently affect freehold reversions.  

If the freehold of a block of flats owned by a company (as is often the case) is valued at more than £2m then it seems that the company owning the freehold will be liable to pay the charge. But the question then is whether they will try to pass this on to the leaseholders in some way.

Comments on the proposals should be sent to HMRC by 23 August 2012.

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