If you are buying your home through a shared ownership scheme operated by a qualifying body, it is important to consider the options available to you when paying SDLT. The following short guide should assist you when making this important financial decision.
What is Shared Ownership?
A shared ownership agreement is made between a homebuyer and a ‘qualifying body’ (e.g. a housing association or local housing authority). It allows someone to buy a share in a property (usually 25%, 50% or 75%) and then pay rent on the remaining share. In effect, the larger the share you purchase, the less rent you will have to pay on the share you do not own.
How is SDLT Calculated on a Shared-Ownership Lease?
There are two ways to pay SDLT when buying through a shared-ownership scheme:
- Making a ‘market value election’: a one-off payment based on the total market value of the property.
- Paying in stages: you are required to pay the total amount due on the initial purchase amount, but you will not be required to make any further payments until you own more than an 80% share of your property.
OPTION 1: Making a One-Off Payment (Market Value Elections)
You are able to make a one-off payment of SDLT as if you had bought the property outright. The amount to be paid will be based on the current market value of the property as stated in the lease.
You will not be asked to make another payment of SDLT in relation to the purchase of this property, whether or not you decide to ‘staircase’ your ownership by buying a larger share or several smaller shares in the future. However, if you do purchase 100% of the property by acquiring the freehold, you must still inform HM Revenue & Customs by filing a return.
This option can be beneficial when the market value of the property is low, or particularly when it is valued below the current SDLT threshold (currently £125,000.00, or £150,000.00 if Disadvantaged Area Relief applies).
If Your Lease Contains a Right to Acquire the Freehold:
SDLT will be charged on the market value of the freehold.
EXAMPLE: If the market value of the freehold is £200,000.00 and you buy a 50% share for £100,000.00, you will pay SDLT at 1% (see the current SDLT rates here) of the total market value of £200,000.00 = £2,000.00.
If Your Lease Does Not Contain the Right to Acquire the Freehold:
SDLT will be charged on the ‘open market premium’.
The open market premium is the amount payable for the maximum share of the property that can be acquired under the terms of the lease.
The ‘net present value’ is also taken into account. This is based on the total amount of rent that would be payable over the term of the lease. In reality, SDLT will only be payable on the rent when it is a significant amount.
If the Lease Has Been Assigned:
Where a previous market value election has been made, SDLT will be payable on the amount paid by the assignee. No further SDLT will be payable, irrespective of whether the new buyer decides to ‘staircase’.
Deadline for Submitting a Market Value Election:
You should make the market value election when you send in the SDLT return. Alternatively, you can make the election up to 12 months after the deadline by amending the return.
Changing Your Mind about a Market Value Election:
Once you have made a market value election (whether by filing or amending a return) you are not permitted to change your mind.
OPTION 2: Paying SDLT in Stages
You are able to pay SDLT in stages by making a payment on the purchase of the initial share and further payments once your share exceeds 80%.
The Initial Payment of SDLT
SDLT is initially charged on the premium paid for the grant of the lease.
Using the above example, by purchasing a 50% share of the property you will not be required to pay SDLT as the value of the premium (£100,000.00) is below the current threshold. However, you must inform HM Revenue & Customs about the transaction by completing a return.
If the market value of the property was £400,000.00 and you were to pay a 50% share for the premium at £200,000.00, SDLT would be payable at 1% of the premium at £2,000.00.
As above, if there is a high annual rent then this will also be taking into account when calculating your SDLT liability.
Buying Further Shares in Your Property (‘Staircasing’)
If, after paying the initial premium, you elect to buy further shares in your property then you will not be required to pay SDLT until your share of the property reaches 80%. Once this threshold has been reached, you will pay SDLT on the following:
- On the transaction that took you over 80% ownership
- All subsequent transactions
The rate of SDLT in these scenarios will be based on the total amount paid for the property so far, including the initial premium for the grant of the lease, as these are all ‘linked transactions’ for HM Revenue & Customs purposes.
To clarify, if you were to ‘staircase’ your share from 25% to 70%, you would not pay any SDLT on this transaction as it would fall beneath the threshold of 80%. However, if you were to increase your share from 25% to 90%, you would pay SDLT on the value of that transaction and the rate would be based on the total amount paid for the property to date.
The following examples use the current SDLT thresholds available on the link above.
Example 1:
STEP 1: You pay an initial £100,000.00 on a 50% share of your property, which has a market value of £200,000.00. SDLT is not payable, but you will need to complete a return to notify HM Revenue & Customs of your purchase.
STEP 2: You then buy a further 25% share at £50,000.00, taking your ownership to 75%. No SDLT is payable and no return needs to be filed.
STEP 3: Finally, you decide to purchase the final 25%, including the freehold, for £50,000.00. At this point, SDLT is payable on 1% of £50,000.00, which is £500.00.
N.B. Had you paid by way of a market value election, you would have paid SDLT at £2,000.00 for this purchase. You have therefore saved £1,500.00 by electing to pay SDLT in stages.
Example 2:
STEP 1: You spend £100,000.00 on a 25% share in a property with a market value of £400,000.00. SDLT is not payable, but you will need to complete a return to notify HM Revenue & Customs of your purchase.
STEP 2: You increase your share to 85% at a cost of £200,000.00. You have exceeded the 80% threshold. The total amount paid to date is £300,000.00 and so SDLT will be payable at 3% of £200,000.00, which is £6,000.00. You will also need to complete an SDLT return at this stage.
STEP 3: You pay £50,000.00 for a further 10% share. The total amount paid to date is £350,000.00. SDLT is payable at 3% of £50,000.00, which is £1,500.00. An SDLT return will again have to be filed.
STEP 4: Finally, you pay £25,000.00 for the final 5% share and the freehold. You now own the property outright. The total amount paid is £375,000.00. SDLT is payable at 3% on the remaining £25,000.00, which is £750.00.
N.B. You have paid a total of £8,250.00 in SDLT for a property worth £375,000.00. Had you paid a one-off payment at the start based on the same market value, you would have spent £11,250.00. However, buying your property in this way may take several years and the housing market can fluctuate dramatically. This should be taken into account when paying SDLT, as well as your ability to pay all at once or in stages.
Example 3:
STEP 1: You pay an initial £50,000.00 on a 50% share in a property with a market value of £100,000.00. SDLT is not payable, but you will need to complete a return to notify HM Revenue & Customs of your purchase.
STEP 2: You pay a further £10,000.00 for an additional 10% share. SDLT is not payable and you will not need to complete a return.
STEP 3: Again, you pay a further £10,000.00 for 10% more. SDLT is not payable and you will not need to complete a return.
STEP 4: You then pay £25,000.00 for a further 20% share, taking you total share to 90%. SDLT is not payable, but you will need to complete a return to notify HM Revenue & Customs of your purchase as you now own over 80% of the property.
STEP 5: Finally, you decide to pay £10,000.00 for the remaining 10% including the acquisition of the freehold. The total amount spent on the property is £105,000.00. SDLT is not payable, but you will need to complete a return to notify HM Revenue & Customs of your purchase.
Contact Lewis Nedas Expert Property Solicitors
If you wish to discuss any of the above with one of our specialist lawyers, please contact us either on 020 7387 2032 or complete our online enquiry form here.