Collective enfranchisement refers to the process where leaseholders in a building join together to buy the freehold of the building. SDLT imposes 3% higher tax rates on purchases of ‘additional’ dwellings (such as second homes and buy to lets) by individuals. It is not obvious why those two concepts should interact. Indeed, the government recognised this by providing an exception to the higher rates where the buyer has a prior interest in the purchased dwelling. Regrettably, for a combination of reasons, the higher rates can apply to collective enfranchisement transactions harshly. Those reasons are these:
the participating leaseholders would be treated as the buyers where, as usual, the purchase of the freehold is made by a nominee company;
the higher rates apply to the whole transaction if having regard to any one of the participating leaseholders the conditions are met;
one of the conditions is that the leaseholder owns a dwelling other than the purchased dwelling – let us suppose one leaseholder does; and
the exception where the buyer has a prior interest in the purchased dwelling does not apply where the prior interest is a lease that has less than 21 years to run.
So, mashing this together, where a participating leaseholder has a lease with less than 21 years to run and another dwelling (anywhere in the world), then the purchase by all the participating leaseholders will be taxed at the higher rates – even if the other participating leaseholders have a lease with more than 21 years to run or do not own another dwelling. That is unfair. In my view, only the proportion of the price attributable to the ‘non-qualifying’ leaseholder should be taxed at the higher rates.
It would be difficult to criticise the participating leaseholders for excluding the ‘non-qualifying’ leaseholder initially, so as to ensure that the purchase of the freehold is taxed at the standard rates and for the ‘non-qualifying’ leaseholder to subsequently buy a share of the freehold at the higher rates. This is similar to the strategy of a person buying a replacement main residence and an additional dwelling from the same person in separate (linked) transactions, which has tacit support from HMRC. Either HMRC should confirm publicly that in their opinion leaseholders are permitted to act in a coordinated way to avoid the higher rates applying to the whole purchase price or the government should amend the legislation. I have drawn this to the attention of the Association of Leasehold Enfranchisement Practitioners and the Law Commission, which are consulting on how to reform the leasehold enfranchisement legislation.
Sean Randall, head of stamp taxes, KPMG
The author thanks Patrick Cannon (Old Square Tax Chambers) for bringing this point to his attention.
Home >Articles > Stamp duty surcharge has unintended consequence
Stamp duty surcharge has unintended consequence
Collective enfranchisement refers to the process where leaseholders in a building join together to buy the freehold of the building. SDLT imposes 3% higher tax rates on purchases of ‘additional’ dwellings (such as second homes and buy to lets) by individuals. It is not obvious why those two concepts should interact. Indeed, the government recognised this by providing an exception to the higher rates where the buyer has a prior interest in the purchased dwelling. Regrettably, for a combination of reasons, the higher rates can apply to collective enfranchisement transactions harshly. Those reasons are these:
the participating leaseholders would be treated as the buyers where, as usual, the purchase of the freehold is made by a nominee company;
the higher rates apply to the whole transaction if having regard to any one of the participating leaseholders the conditions are met;
one of the conditions is that the leaseholder owns a dwelling other than the purchased dwelling – let us suppose one leaseholder does; and
the exception where the buyer has a prior interest in the purchased dwelling does not apply where the prior interest is a lease that has less than 21 years to run.
So, mashing this together, where a participating leaseholder has a lease with less than 21 years to run and another dwelling (anywhere in the world), then the purchase by all the participating leaseholders will be taxed at the higher rates – even if the other participating leaseholders have a lease with more than 21 years to run or do not own another dwelling. That is unfair. In my view, only the proportion of the price attributable to the ‘non-qualifying’ leaseholder should be taxed at the higher rates.
It would be difficult to criticise the participating leaseholders for excluding the ‘non-qualifying’ leaseholder initially, so as to ensure that the purchase of the freehold is taxed at the standard rates and for the ‘non-qualifying’ leaseholder to subsequently buy a share of the freehold at the higher rates. This is similar to the strategy of a person buying a replacement main residence and an additional dwelling from the same person in separate (linked) transactions, which has tacit support from HMRC. Either HMRC should confirm publicly that in their opinion leaseholders are permitted to act in a coordinated way to avoid the higher rates applying to the whole purchase price or the government should amend the legislation. I have drawn this to the attention of the Association of Leasehold Enfranchisement Practitioners and the Law Commission, which are consulting on how to reform the leasehold enfranchisement legislation.
Sean Randall, head of stamp taxes, KPMG
The author thanks Patrick Cannon (Old Square Tax Chambers) for bringing this point to his attention.
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