First Time Buyer paying SDLT (Market Value Election vs Payment in Stages)

Jose_Ferraro

I am a first time buyer (FTB) purchasing 30% (£123,750) of a new build shared ownership (lease hold) property whose 100% value is £412,500. The 'market value election' for paying SDLT will be £5,625 including the FTB relief (ie. 5% of £112,500 over the £300,000 threshold). Apart from the considerable initial expense this seems like the simplest option.

If I were to opt to 'pay in stages' I know that there would be no SDLT to pay for the first transaction of the 30% share. However if my circumstances change I may plan to staircase up another 30% or 40% in future remaining below the 80% threshold. I'm concerned that in future the market value of the property may increase to over £500,000 at which point I will not be eligible for the FTB relief any longer and will probably be liable to pay SDLT according to the standard rate for purchasing any future shares - which then opens up some quite complicated questions.

If the market value of the property were to increase over the £500,000 threshold after initially purchasing my share of £412,500 would I then have to pay SDLT retrospectively according to the standard tax rate for the initial 30% share that I received the FTB relief for?

Under the standard SDLT laws would I then be charged SDLT on the rent that I pay for the remaining 70% of the property according to Net Present Value (NVP)?

If I opted to sell the initial 30% share in future and the total market value of the property was over £500,000 at the time of sale would I be obliged to pay SDLT retrospectively on that 30% share?

Its very difficult to judge early on whether or not its worth paying the SDLT of £5,625 (market value election) without knowing the specifics of the alternative.

Many thanks in advance for any insight to this situation.

SDLT_Geek

Jose_Ferraro wrote: »

I am a first time buyer (FTB) purchasing 30% (£123,750) of a new build shared ownership (lease hold) property whose 100% value is £412,500. The 'market value election' for paying SDLT will be £5,625 including the FTB relief (ie. 5% of £112,500 over the £300,000 threshold). Apart from the considerable initial expense this seems like the simplest option.

If I were to opt to 'pay in stages' I know that there would be no SDLT to pay for the first transaction of the 30% share.
Yes, the relief would also cover the rents, so no SDLT to pay on the net present value of the rent on the 70% you have not bought. This is thanks to a change in the Budget of 29 October 2018.

However if my circumstances change I may plan to staircase up another 30% or 40% in future remaining below the 80% threshold.
There would be no more SDLT to pay if you did not exceed the 80% threshold.

I'm concerned that in future the market value of the property may increase to over £500,000 at which point I will not be eligible for the FTB relief any longer
You would not be entitled to FTB relief on staircasing anyway. You had previously acquired an interest in a dwelling. It does not help you that it was the same one.

and will probably be liable to pay SDLT according to the standard rate for purchasing any future shares
No, only on the purchase of the share that takes you over 80%.
- which then opens up some quite complicated questions.

If the market value of the property were to increase over the £500,000 threshold after initially purchasing my share of £412,500 would I then have to pay SDLT retrospectively according to the standard tax rate for the initial 30% share that I received the FTB relief for?
No. There are special rules about linked transactions here which mean that you do not need to revisit the first acquisition on account of later staircasing transactions.

Under the standard SDLT laws would I then be charged SDLT on the rent that I pay for the remaining 70% of the property according to Net Present Value (NVP)?
No, see above. FTB relief now covers the NPV.

If I opted to sell the initial 30% share in future and the total market value of the property was over £500,000 at the time of sale would I be obliged to pay SDLT retrospectively on that 30% share?
No.

Its very difficult to judge early on whether or not its worth paying the SDLT of £5,625 (market value election) without knowing the specifics of the alternative.
See the example below.

Many thanks in advance for any insight to this situation.

So here is a worked example of the SDLT if you elect to pay SDLT in stages.

There is no SDLT on the purchase of the first 30% or on the NPV of rents because of first time buyers' relief.

Lets say you then staircase in stages as the value climbs. Let us say you end up paying a total of £550,000 and the transaction that takes you over 80% is for a payment of £110,000.

There is then SDLT due on that last transaction. It is worked out by first finding out what the SDLT would be on a £550,000 transaction. At present standard rates it is £17,500.

But that is not what you would pay. You would pay a fraction of that. The fraction is 110,000 / 550,000. 1/5. 1/5 th of £17,500 is £3,500.

So on these figures you pay less (you pay £3,500) than if you elect to pay on market value (£5,625). Of course you might not staircase to over 80% anyway.

Jose_Ferraro

Thanks a lot for the detailed reply SDLT Geek.

So in your example the transaction that results in over 80% ownership incurs £3,500 SDLT. I'm assuming that your example intended that there was no SDLT to pay for the prior 'stair casing' transactions however as the 80% threshold was reached would those previous transactions be 'linked' to this one resulting in SDLT to pay for them?

Its very confusing as the gov.uk website (Stamp Duty Land Tax: shared ownership property) gives two examples of 'stair casing' for the payment in stages election. In the first example there is no SDLT to pay for the stair casing transaction except for the transaction that goes over the 80% ownership threshold. In this example it states that there would be SDLT to pay on the 'lease premium' ie. the initial transaction.

In the second example SDLT is worked out with each 'stair cased' transaction using the same formula you explained in your example for each transaction. There is no explanation as to why examples 1 and 2 differ in the way SDLT is treated. There is a vague mention of the start date of different tax laws. Unfortunately MSE will not allow me to attach an active link directly to the page.

gov.uk/guidance/sdlt-shared-ownership-property#paying-sdlt-in-stages-and-buying-further-shares

Again many thanks for sharing your knowledge on this.

Jose

00ec25

Jose_Ferraro wrote: »

two examples of 'stair casing' for the payment in stages election.

read it again

you missed the significance of the examples having different dates

"But if the first grant of the lease took place on or after 12 March 2008, this transaction is excluded because it doesn’t count as linked with the rest of the transactions."

SDLT_Geek

Because the lease you are acquiring is granted on or after 12 March 2008 we have the confusing situation that linking happens only one way!

The transaction that takes you over 80% is treated as linked with the earlier transactions. That explains why in my example the SDLT is first worked out on £550,000 (before we take a fraction).

But there is no linking the other way. So the original grant of the lease does not need to be revisited on account of the later transactions to up the amount of SDLT (and cause the loss of FTB relief).

It would be different if we were looking at a pre 12 March 2008 lease.

Jose_Ferraro

Many thanks for explaining this plus the dates!

Under the current tax law then a first time buyer could elect to pay SDLT in stages, 'stair case' up to a share of 75% ownership and then sell that share without incurring any SDLT at any point regardless of the market value exceeding £500,000 or no longer being considered a FTB at the time of sale. It seems too good to be true. My solicitors did not explain the payment in stages law in not nearly half as much detail.

Therefor lets say, in your example, that the transaction (£110,000/20%) resulted in reaching 80% ownership incurring the (1:5) £3,500 SDLT. A purchase of a further 20% at the same cost and market value takes me to 100% ownership. It would only result in a further £3,500 totalling to £7,000 SDLT. All together this would not be such a detrimental amount of tax compared to the initial £5,625 SDLT 'full market value election'. Is this correct?

Of course the total amount of SDLT will be dependent on how high the market value of the property increases which if I were to sell before reaching the 80% ownership threshold would be nothing I would have to take into account when selling.

00ec25

Jose_Ferraro wrote: »

Therefor lets say, in your example, that the transaction (£110,000/20%) resulted in reaching 80% ownership incurring the (1:5) £3,500 SDLT. A purchase of a further 20% at the same cost and market value takes me to 100% ownership. It would only result in a further £3,500 totalling to £7,000 SDLT. All together this would not be such a detrimental amount of tax compared to the initial £5,625 SDLT 'full market value election'. Is this correct?.

no, as stated you do not pay any SDLT at all until you take a step which takes you OVER 80%. Your scenario above takes you to 80%, not over it.

Therefore there would only be one lot of SDLT to pay, the £3,500 as shown by geek. In the scenario you ask about there is no "further" SDLT because you have never paid any in getting to 80% in the first place.

if you want to better understand it, then read example 2 in the guide again and post up your calculation using a scenario where step 4 takes you from 75% to 85% and then step 5 takes you from 85% to 100%. Then you will understand the impact of the apportionment calculations

https://www.gov.uk/guidance/sdlt-shared-ownership-property

SDLT_Geek

Jose_Ferraro wrote: »

Many thanks for explaining this plus the dates!

Under the current tax law then a first time buyer could elect to pay SDLT in stages, 'stair case' up to a share of 75% ownership and then sell that share without incurring any SDLT at any point regardless of the market value exceeding £500,000 or no longer being considered a FTB at the time of sale.
Correct. Even odder, if the new owners chose to staircase, their payments would not be treated as linked to yours it appears, so although they pay a "normal" amount of SDLT on the price they pay you, they might pay much less on a staircasing transaction than you would have done.

It seems too good to be true. The rules around SDLT on staircasing are rather bizarre.
My solicitors did not explain the payment in stages law in not nearly half as much detail.

Therefor lets say, in your example, that the transaction (£110,000/20%) resulted in reaching 80% ownership incurring the (1:5) £3,500 SDLT.
Let's say it reached 81%, as a payment is only due when the share is over 80%
A purchase of a further 20% at the same cost and market value takes me to 100% ownership.
Let's say the last 19% is bought at the same cost, so another £110,000 bringing the total paid for the property to £660,000.

It would only result in a further £3,500 totalling to £7,000 SDLT. All together this would not be such a detrimental amount of tax compared to the initial £5,625 SDLT 'full market value election'. Is this correct?
No, the calculation is more complex than that. We look at it in two stages: (a) The SDLT now due on buying the last 19% share for £110,000 and (b) Any extra SDLT due on buying the previous share that got you to 81% as a result of the later linked transaction.

(a) To work out the SDLT due on the last 19% share we first work out the SDLT on the total £660,000 paid. Using today's standard rates that would be £23,000. But the SDLT is a fraction of that. The fraction is £110,000/£660,000. 1/6. 1/6 of £23,000 is £3,833.

(b) To work out any extra SDLT due on the purchase (also for £110,000) which got you to 81% we first work out the SDLT on the total £660,000 paid. Using today's standard rates that would be £23,000. But the SDLT is a fraction of that. The fraction is £110,000/£660,000. 1/6. 1/6 of £23,000 is £3,833. But £3,500 was paid at the time of the acquisition that got you to 81%. So another £333 is now due on the acquisition that got you to 81% because of the later purchase.

So the staircasing from 81% to 100% results in SDLT of £3,833 and £333 which is £4,166. That is on top of the £3,500 paid on staircasing to 81%.

Of course the total amount of SDLT will be dependent on how high the market value of the property increases which if I were to sell before reaching the 80% ownership threshold would be nothing I would have to take into account when selling.

Yes, these are just illustrative figures.

Jose_Ferraro

Sorry SDLT Geek but how did you work out the sum of £333 to add to the apportioned SDLT of £3,833? Is it £3,833 - £3,500 = £333? I tried to apply this to Example 2 on the gov.uk website I couldn't come up with the sum of £743 to match their example.

In summary:
The SDLT you’ll pay on the second transaction is £1,941 (£2,750, apportioned 180:255)
The SDLT you’ll pay on the third transaction is £447 (£4,250, apportioned 30:285)
You’ll pay a further £743 on the second transaction...

gov.uk/guidance/sdlt-shared-ownership-property#paying-sdlt-in-stages-and-buying-further-shares

00ec25

Jose_Ferraro wrote: »

I couldn't come up with the sum of £743 to match their example.

it is there in black and white. Always best to set our staircase SDLT calculations in a table so you can see the rows and columns

"Additional tax calculation
£180,000 (transaction 2) ÷ £285,000 (total paid transaction 3) x £4,250 (tax due on total consideration) = £2,684.

Tax due on transaction 2 = £2,684.

Tax paid to date on transaction 2 = £1,941.

Additional tax to pay on transaction 2 = £743."

Jose_Ferraro

Thanks 00ec25.