When buying a new build property, the Stamp Duty Land Tax (often referred to as SDLT or SDLT on land), can often be a significant sum of money and in some instances, it can act as a deterrent to actually buying the house. There is a legal alternative to paying this hefty sum of money to the government. Paying stamp duty when building a house can be structured in a more advantageous way. Sometimes the developer will allow you to buy a plot of vacant land and simultaneously enter into a building contract for the construction of the dwelling which can provide a substantial SDLT saving. In this way, the stamp duty on the building plot will be much less than if you were buying the fully built house. In this article, stamp duty on land with planning permission, we take a look in more depth at the advantages of structuring a new build house purchase in this way.
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For a free initial discussion on how we can advise you on your options for mitigating stamp duty on land with residential planning permission, get in touch with us today. We are experienced in dealing with stamp duty when building a house and we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you avoid the stress of dealing with these issues on your own especially if you are considering buying a plot of land without planning permission. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.
How does it work in practice?
For example, Andy the developer owns a site with planning for 5 luxury houses. Sara wants to buy one of the homes and Andy offers the following two options:
Option 1: Sara would pay Andy £750,000 upon completion of the house.
Option 2: Sara would agree to buy the vacant plot land from Andy for £200,000 and then pay Andy £550,000 after the purchase of the plot by installments throughout the build process.
What would the SDLT obligations be?
If we consider the circumstances of option 1, assuming the house will be Sara’s primary residence and she doesn’t own any other properties, her SDLT liability would be £25,000 (As from 1st July 2021 – 30th Sept 2021. After this period, there is a proposed change in rates).
The SDLT would be due within 14 days of completion of the sale which is usually a set number of days after practical completion of the build.
If we consider the circumstances of the second option,
The value of the vacant land (in this example, £200,000) must be a “just and reasonable” valuation thus, it is important that Andy is able to offer Sara evidence for the valuation given.
If building work has yet to start and the current/past use is non-residential, Sara’s SDLT liability could be as little as £0, giving a potential saving of £25,000. The same figures would apply even if the land is deemed to be for residential use.
To maximise the SDLT savings available under Option 2, Andy would need to make sure that no building works have begun at the time the plot of land is sold to Sara. If building works have started, there is still likely to be substantial SDLT savings however, the land valuation is likely to be higher.
The SDLT would be due within 14 days of the purchase of the vacant plot of land completing which is much earlier in the process. Given the potential savings, this does not deter many people but it is important to bear in mind for budgeting purposes.
What happens if Sara owns another property or the house won’t be her primary residence?
If Sara owns other residential dwellings or she doesn’t intend to live in this new build property, the SDLT surcharge rates will apply. In this example, if Sara intended to rent out the house as a buy to let, her SDLT would be £47,500. However, if she pursued Option 2 and no building works had started, the surcharge would not apply despite the fact it was not intended to be her main residence and her SDLT liability would remain £0. In this instance, the SDLT saving would be £47,500.
How will you fund the purchase?
If you intend to purchase the property or land for cash, it is up to you as to which of the two options you intend to pursue, although option 2 does offer significant savings.
If you intended to purchase the house using conventional bank borrowings, you will need to be aware that this is a specialised area of finance as a high street lender is unlikely to provide funding for the construction if you elect to buy the land and fund the build separately. However, there are many lenders that would be happy to provide you with suitable finance, subject to your own personal circumstances.
How will you manage the build process if you buy the land separately?
As mentioned above, the requirements of a number of funders can prevent people from taking advantage of these SDLT savings. Additionally, there are a number of risks associated with buying the land first and then having to deal with the build process.
Key issues which will need to be considered and agreed upon between the developer and the purchaser can include:
- The price, delivery on time, and quality of the build
- What is the scope of the contracted works? Is any design included? If so, consideration needs to be given to the design obligations.
- Is it a fixed price design and build contract or a less formal arrangement?
- What obligations will the contract price for the contracted works include or exclude?
- By when are the contracted works to be completed?
- How will the completion of the works be established/certified?
- Will a defects rectification period apply? If so, for how long?
- How will variations to the original scope of works be discussed, implemented, and valued?
- Will project delays be at the risk of the developer, the purchaser, or a mixture of the two?
- What payment regime will apply? Who will certify payments? Will the parties operate a retention mechanism?
- Will you be using the services of an employer’s agent or fund monitor?
- Which party will take responsibility for the necessary insurances and what levels of insurance cover are required?
- Who is responsible for site condition risk, nuisance, trespass, etc?
There is a lot to consider when being involved in the build of a house but with the support of experienced solicitors specialising in construction law, safeguards can be put in place and the whole process can become less daunting.
How we can help
We have a proven track record of helping clients minimise stamp duty on a building plot. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact Our Commercial Property Solicitors
It is important for you to be well informed about the issues and possible implications of paying the correct stamp duty on development land. However, expert legal support is crucial in terms of ensuring a positive outcome to your case..
To speak to our Commercial Property solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
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