Stamp Duty Land Tax for shared ownership property purchases

A key expense of buying property is Stamp Duty Land Tax. There are different ways of paying SDLT when you buy a property through a shared ownership scheme.

Stamp Duty can be expensive and confusing, even when buying property outright. Shared ownership stamp duty has different rules from standard property purchases. A common question we are asked is: Do you pay Stamp Duty Land Tax for shared ownership property purchases?

In this blog, we’ll explain all you need to know about Stamp Duty Land Tax paid on shared ownership property purchases.

What is Stamp Duty Land Tax? (SDLT)

Stamp Duty Land Tax (SDLT) is a tax levied by the UK government on the acquisition of land and properties with a value exceeding a certain threshold. The tax is calculated based on the property purchase price.

This tax must be paid to HMRC within 14 days of the completion of the purchase or transfer of the property in England or Northern Ireland.

The rates payable are generally determined by the use of the land or property, which may be residential, non-residential, or mixed-use. However, there are SDLT reliefs and exemptions which you should also be aware of.

What is shared ownership?

In the UK, individuals have the option to buy property on a shared ownership basis. Shared ownership is a UK government-backed scheme designed to help people get on the property ladder, even if they can’t afford to buy a home outright.

Shared ownership allows buyers to purchase a percentage of a property and pay rent on the remaining percentage. They can then gradually increase their ownership stake and eventually own the property outright (this is referred to as staircasing).

An approved qualifying body, such as a housing association, local authority, or certain other public sector bodies, can operate the shared ownership scheme.

Do you pay stamp duty on a shared ownership property?

You may need to pay SDLT when purchasing a property through a shared ownership scheme. This will depend on the value of the property and the amount of Stamp Duty you opt to pay.

When you purchase a new shared ownership property, you can pay Stamp Duty Land Tax on the full market value of the property (this is called a market value election) or just on the initial share you purchase and the rent you pay.

For many shared ownership buyers, paying an SDLT payment on the initial share only sounds like the most cost-effective option. However, it can result in additional SDLT charges in the future.

Note: If you’re a first-time buyer purchasing a property worth £300,000 or less, you’ll be exempt from paying anything on the first £300,000 but will be taxed at a rate of 5% on the portion from £300,001 to £500,000.

When you buy a property from a shared ownership scheme, you calculate SDLT each time you purchase a share of the property. These transactions count as linked transactions for SDLT.

Paying SDLT on full market value (market value election)

Paying all the Stamp Duty in one go on the market price is known as a full market value election. You pay SDLT at the prevailing rate on the full value of the property at the time of purchase. Once you’ve paid the SDLT, you will not pay any further Stamp Duty on that property whilst living in it or when you sell it.

The benefits of a market value election are:

• There is no more SDLT when you purchase additional ownership in the property (future staircasing).
• If applicable, you can apply your first-time buyer relief to the full market value.
• If the property increases in value, you won’t have to pay any further SDLT.

The disadvantages of a market value election are:

• You have to find the full amount of SDLT at the point of purchase.
• Instead of paying the full SDLT costs, you could purchase a larger share of the property.

Paying SDLT on the initial share you purchase (incremental basis)

Many first-time or budget-conscious buyers often choose to pay SDLT on the share of the property they purchase rather than on the full market value to minimise initial costs. This is referred to as paying in stages.

When paying in stages, you’ll pay the amount due on the first transaction and then only pay staircasing Stamp Duty once you’ve reached 80% shared ownership or above.

When you pay in stages, the stamp duty is based on:

• The price you pay for your share of the property, and
• An additional amount based on the rent you are required to pay. This is a complex calculation based on the total rent payable over the lease’s lifetime.

The advantages of paying SDLT on the share of the property you own are:

• SDLT costs are paid in smaller sums over a period of time.
• You only pay on the initial share in the property and then once again when you own 80% of the property.
• No additional SDLT is payable if your ownership remains under 80%.
• You can still benefit from first-time buyer relief on the first transaction.

The disadvantages of only paying SDLT on your share of the property are:

• If the property increases in value, you may end up paying more SDLT in the long term.
• You only benefit from first-time buyer relief on the first transaction (which may not use up all of the relief available to you).
• SDLT rates may change and increase in the future, resulting in you paying more.
• Your SDLT bill will still be outstanding in the future.

Staircasing shared ownership

Staircasing is a process where you purchase additional shares in the property, thereby increasing your ownership and reducing your rent until you eventually own 100%.

Paying SDLT in stages means that additional SDLT payments become payable when you staircase above 80% overall ownership of the property. No additional SDLT is payable if your ownership remains under 80%.

SDLT on staircasing transactions can be complex, so here is our quick guide to what happens when you pay SDLT as you staircase.

1. Once your ownership stake increases above 80%, SDLT is payable on the staircasing transactions at the SDLT rate that applies at the time.

2. If you staircase in increments, for example, 5% increments to 85% and then 90% ownership, the additional SDLT may be more than expected. This is because HMRC treats these additional purchases as linked transactions. SDLT is charged on the total value of all linked transactions, meaning you could end up paying a higher rate of SDLT than if the transactions were counted individually.

3. Depending on how your shared ownership arrangement is structured, when you sell your property, you may also need to staircase your ownership to 100%. However, you should be able to eliminate this charge by claiming Stamp Duty sub-sale relief.

How to choose the best option for you

Which option is best for you will depend entirely on your individual circumstances. You must take into account the following:

• The value of the property.
• Your current financial situation.
• Your future plans (for example, are you planning on staircasing, will you reach 80% ownership or above?).

If you are not planning to buy additional shares, it may be more beneficial to pay a lower SDLT bill now, as you may not benefit from paying on the full market value.

If you do plan to staircase ownership above 80% and want to own the property 100% in the future, then paying at full market value now (if you think the property will increase in value significantly in future or you qualify for first-time buyer’s relief).

Summary

Stamp Duty on shared ownership can be complex and making the best decision for you can be a challenging task. Future transactions and future SDLT rates could result in a larger SDLT bill on your shared ownership property in the future if you pay SDLT on an incremental basis.

At dns accountants, we have a specialist property team that is experienced in dealing with all your SDLT questions and can advise you on how to minimise your SDLT bill. Contact dns today on 03330600706 or email us on enquiry@dnsaccountants.co.uk.

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