Discount market sale (DMS) property staircasing after buying another home - SDLT implications

emcat

I think this is quite a niche scenario but keen to seek some advice. I have a discount market sale flat that I own a percentage of (and don't pay rent on the rest, unlike shared ownership). My husband and I have recently moved out of the flat and bought a house. We want to keep the flat and are going through the council to staircase up to 100% with a buy to let mortgage at which point we will let the property out. I paid SDLT on the percentage of the flat I originally purchased. We have then paid the additional 2nd property SDLT (actually LBTT as we moved to Scotland) on our new house. Will I have to pay the additional 2nd property rate on the purchase of the remaining share of the DMS flat when I complete the staircasing? I realise it would have been better to complete the staircasing before buying a house but we were desperate to get a bigger place in covid times and fortunate enough to be able to do so.

SDLT_Geek

You are right that this is a niche scenario.  I did look up "discount market sale" structures a while ago.  

As I recall it, the structure often works by the buyer taking full ownership of the property (which explains why there is no rent to pay on the discount percentage).  The property is often bought from a private developer, who has agreed with the planning authority to provide affordable housing in this way.  There is a section 106 planning agreement which says that the property cannot be sold for more than the discounted price.  

This is designed to keep the property available for use for those with housing need.  Sometimes there is the ability to "buy out" the planning agreement restrictions by paying the local planning authority.  Does this sound like what you have?

emcat

Yes, that sounds right. I own the property but have a deed of restriction in place that prevents me from subletting and allows, at the council's discretion, for me to staircase up to 100%. They have agreed I can do this so I'm going through that staircasing process now.

I have checked my previous SDLT return for when I purchased the initial share and the consideration is the percentage I purchased at the time, so I believe I will need to pay SDLT on the remaining percentage based on the recent surveyor valuation of the property. And then given I already purchased another property, the bit I'm unclear on is whether that will incur the additional SDLT rate. To me that doesn't seem right that I will then have had to pay the additional rate on both properties, but that might be the case under the letter of the regulation?

Another consideration I just thought about is that my husband already has another flat so regardless of whether I am staircasing the rest of the flat myself, given that we are married it is treated as a joint purchase and therefore is subject to the additional rate regardless?

SDLT_Geek

Whether the 3% surcharge applies will depend on what you are acquiring.  It seems to me that you already own all of the property and pay no rent.  (So it is not helpful to refer to it as staircasing).  

Perhaps what you are paying for is a release of a covenant under a deed.  If so, then you might not be acquiring a "major interest" in a property.  Whilst you are acquiring an interest, on which SDLT could in principle be due, the 3% extra only applies to the acquisition of a major interest.
Perhaps someone will come along soon who has more experience than me of discounted market sale properties, perhaps @davidmcn will know.

princeofpounds

The description of the schemes I have seen tend to imply that the OP does not own 100% of the property. Rather they buy less than 100% but unlike shared ownership there is no rent to pay on the portion of equity they do not own. e.g. Pg 3 of https://www.lbhf.gov.uk/sites/default/files/section_attachments/home_buy_guide_tcm21-191012.pdf. (And so there was no SDLT on the lease portion of the original transaction).

In which case I think (I'm no SDLT geek but I can read the manual) the original purchase and the 'staircasing' purchase would be viewed as linked transactions and SDLT liability would be calculated across both transactions, deducting what had already been paid. https://www.gov.uk/guidance/sdlt-shared-ownership-property. That assumes you didn't elect to pay SDLT on the full market value at the start, which is an option you can elect. Whether the additional rate also applies given this was your 'first' property I have no idea, sorry.

However if the situation is as SDLT_geek suggests and you have 100% ownership with only some kind of deed restricting you, then you'd probably have to ask HMRC for guidance because it seems to be a rare topic not covered in the manual. I suspect you'd have to pay though - otherwise everyone would selling properties encumbered with deeds of restriction for peanuts, and then revoking the deed for the real payment. 

I'm surprised a bit of casual googling didn't find a more precise answer to this actually, as DMS isn't totally unheard-of. The only conveyancer I could find who had an information page of the topic noted that they had reached out to HMRC for guidance and didn't get a reply by the time of writing.

I also think these schemes are utterly stupid from a governance point of view - making housing more expensive for all the other buyers so a chosen few can get it on the cheap. But that's a topic for another day and not the OP's problem.