As of the 6^th April 2011, a new 5% rate of SDLT will apply to residential property purchases where the purchase price is greater than £1,000,000.  This rate will apply to any transaction where the “effective date” as defined in the Finance Act 2003 (usually the date of completion) is on or after 6 April 2011.  The only exceptions will be certain contracts which were entered into before the 25^th March 2010.

SDLT will remain payable at the rate of 4% on transactions involving non-residential or mixed-use property.  As such, the definition of “residential property” for the purposes of the calculation of Stamp Duty Land Tax liability is likely to come under far greater scrutiny than it has in the past.

Broadly speaking, section 116 of the Finance Act 2003 defines “residential property” as: 

• any building or part of a building that is either used as a dwelling or suitable for use as a dwelling;
• any building that is in the process of being constructed or adapted for use as a dwelling;
• land that forms part of the gardens or grounds of such a building;
• any right benefiting such land or buildings.

Student’s halls of residence, children’s homes, care homes, clinics, hospitals, prisons and hotels are all excepted.

Crucially, transactions involving six or more dwellings are also excluded from the definition of “residential property.”  This could create some quite anomalous results.  The purchase of a portfolio of five residential houses at a price of £300,000 each would give a combined purchase price of £1,500,000 and attract SDLT at the rate of 5%, equating to a tax liability of £75,000.  The purchase of six of those houses, however, would give a combined purchase price of £1,800,000 but only be liable for SDLT at the rate of 4% and thus lead to a reduced tax liability of £72,000.

It is also arguable whether a house that has been converted into six flats is “suitable for use as a dwelling” and thus would qualify as residential property, or whether it is six separate dwellings and so would be considered non-residential property.