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Many people who are in the process of getting divorced in the UK will be selling and/or buying a property as a result. The recently announced changes to the Stamp Duty Land Tax (SDLT) regime are therefore important to understand.SDLT is a tax paid by the buyer on the purchase price of a property in the UK. It can be a significant cost that needs to be factored into any discussions about how to divvy up the assets in a divorce.Under the old regime, SDLT was calculated by applying a flat rate of tax to the entire value of the property. The old SDLT rates were.
The way the flat rate applied to the entire purchase price created a ‘cliff edge’, where a small increase in the purchase price, into the next price band, resulted in a dramatically larger tax bill. For example, a £250,000 purchase resulted in tax of £2,500 (1% of £250,000) whereas a £260,000 purchase would cost £7,800 (3% of £260,000). Expressed another way, a 4% increase in price resulted in a 212% increase in SDLT! This clearly had a distortive effect on the house price market, with houses often selling for £250,000 (or slightly under) but very rarely for slightly more e.g. £255,000. As a result, the old regime will have left many sellers trapped at or under the £250,000 price mark. Similar effects have occurred at the other boundary prices i.e. £500,000, £1,000,000 and £2,000,000.To avoid this problem the new regime is a graduated system that works in a similar way to income tax by applying a sliding scale i.e. different rates to different portions of the purchase price. The new system is designed to smooth over the ‘cliff edges’ of the old regime. The new rates are summarised in the following table.
For example, for a property of £250,000, the SDLT is the same as before at £2,500 (0% SDLT on the first £125,000 of the price plus 2% on the remaining £125,000). However, the distorting effect of moving from £250,000 to £260,000 has gone. For a £260,000 purchase, £2,500 is payable on the first £250,000 (as above) and then the next percentage rate of 5% is payable only on the amount above £250,000 i.e. £500 (5% of £10,000). The total SDLT is therefore £3,000 compared to the £7,800 payable under the old regime.This change has been sold as a tax-cut for 98% of the property-purchasing population because the tax on properties between £250,000 and £1,125,000 will be less than before, with only properties above £1,125,000 leaving buyers with a larger bill. For the vast majority of those looking for a new home following a divorce this should be welcome news. For those looking at top end property, however, alarm bells will be ringing.There is already evidence that sellers are taking advantage of the new regime by hiking up prices, secure in the knowledge that buyers now have slightly more cash to play with given the same property and the same budget. The tax saving to buyers may well therefore end up being something of a mirage as savvy sellers and their estate agents re-list their properties at higher prices. This strategy will be particularly popular for sellers who will have felt trapped by the ‘cliff edge’ effects of the previous regime. Expect to see houses previously listed at £249,950 or £499,950 going for £260,000 or £520,000 respectively. At the other end of the spectrum, the opposite may well prove to be true. Substantially larger SDLT bills will reduce the buying power on properties above the £1.125m mark, with the effect that sellers might have to revise asking prices of very expensive homes downwards.If you are trying to work out your housing budget following separation and you are going to need to sell your former matrimonial home to fund the purchase of one or more new properties, not only should you be clear what your new SDLT liabilities might look like, you should also consider whether any valuations that you have been relying on are still accurate.