Buying a home is hands down one of the most significant financial decisions you’ll ever make, and if you’re considering a shared ownership property, getting your head around the costs involved will help you make an informed decision.
One of the key expenses you might encounter when buying a property is Stamp Duty Land Tax, which can be confusing at the best of times, but even more so with shared ownership schemes where the rules are different from standard property purchases.
Whether or not you have to pay Stamp Duty Land Tax on a shared ownership property is a common concern for first-time buyers.
In this article, we’ll break down everything you need to know about Stamp Duty Land Tax for shared ownership properties. We’ll explain what it is, how it applies to shared ownership homes, and the different ways you can pay it. We’ll also cover potential reliefs and exemptions, what happens if you decide to staircase, and answer some frequently asked questions.
Table of Contents
- What is Stamp Duty Land Tax (SDLT) and why do you have to pay it?
- What is shared ownership and how does it work?
- Do you have to pay SDLT when you buy a shared ownership property?
- What are the payment options for SDLT on shared ownership property?
- What is the Market Value Election?
- What is the Incremental Basis?
- How do you calculate SDLT for shared ownership?
- How is market value determined for residential properties?
- How is market value determined for leasehold properties?
- What if the lease doesn’t include freehold rights?
- How do you choose the best option?
- Are there any SDLT reliefs for shared ownership properties?
- When is SDLT due for shared ownership properties?
- How does SDLT apply to staircasing?
- What if the property’s market value increases over time?
- How can I get help with SDLT and shared ownership?
What is Stamp Duty Land Tax (SDLT) and why do you have to pay it?
Stamp Duty Land Tax is a tax you pay when you buy property or land over a certain price. It applies whether you’re purchasing your first home, a second property, or an investment property.
SDLT is a legal requirement. As such, you should factor it into your overall budget when buying a home.
What is shared ownership and how does it work?
Shared ownership is a government-backed scheme designed to help people buy a home.
Instead of buying the entire property outright, you buy a share of the property (usually between 25% and 75%) and pay rent on the remaining share, as well as service charges for the maintenance and upkeep of the building and communal areas.
Do you have to pay SDLT when you buy a shared ownership property?
You have to pay Stamp Duty Land Tax when you buy a shared ownership property. However, the way SDLT is calculated and paid for shared ownership properties differs from standard property purchases.
What are the payment options for SDLT on shared ownership property?
When purchasing a shared ownership property, you have two options for paying SDLT:
Market Value Election: This allows you to pay SDLT on the property's full market value when purchasing your initial share.
Incremental Basis: With this method, you pay SDLT on the value of your initial share, then pay additional SDLT each time you buy more shares in the property.
What is the Market Value Election?
Market Value Election is where you pay SDLT on the full market value of the property upfront, even though you’re only buying a share initially. This can simplify future payments as you won’t need to pay SDLT on future staircasing.
For example, if you buy a 50% share in a property valued at £300,000 and pay SDLT at the full market value, the SDLT rate will be applied to the full £300,000 market value. However, you won’t have to pay any future SDLT charges if you decide to buy more shares in the property later.
What is the Incremental Basis?
The incremental basis allows you to pay SDLT based on the value of each share you buy. That means, initially you pay SDLT on the first share and then again on each additional share as you staircase.
For example, if you buy a 50% share in a property valued at £300,000 and pay SDLT on an incremental basis, the SDLT rate will be applied to the value of your initial share (£150,000). Then, if you decide to buy additional shares later on you will have to pay further SDLT on the value of each as purchased.
This method can be helpful if you aren’t planning to staircase to 100% ownership quickly, as it spreads the SDLT payments over time, making it more manageable.
How do you calculate SDLT for shared ownership?
How much SDLT you pay on a shared ownership property depends on how you choose to pay it.
If you opt for Market Value Election you should:
Determine the full market value of the property
Apply the standard SDLT rates to this value
Pay SDLT based on the total calculated amount upfront
Example: For a property with a market value of £300,000, even if you initially buy a 50% share, you pay SDLT on the full £300,000.
If you opt for Incremental Basis you should calculate SDLT on the initial share you are purchasing. Then, every time you buy an additional share, calculate SDLT based on the value of that share. Depending on the initial share, you may find that you don’t have to pay any SDLT initially using this method.
Example: For a property with a market value of £300,000, if you buy a 50% share, you would pay SDLT only on the £150,000 share. If you later buy more shares, you will pay SDLT on the value of each additional share.
SDLT rates are structured in thresholds. This means different portions of the property prices are taxed at different rates. What’s more, first-time buyers benefit from relief in SDLT rates, too. Therefore, you should apply the relevant standard SDLT rates for your situation to accurately calculate costs.
How is market value determined for residential properties?
For residential properties, the market value is the price at which the property would sell on the open market. This valuation is usually carried out by a professional surveyor or valuer who considers factors such as:
Location
Property size and condition
Market trends
Comparable sales in the area
How is market value determined for leasehold properties?
For leasehold properties, the market value includes the price for the initial share and considers the value of the lease.
If the lease allows you to eventually own the freehold, SDLT is charged on the market value of the freehold as stated in the lease.
What if the lease doesn’t include freehold rights?
If the lease does not allow you to purchase the freehold, SDLT is calculated on the highest share you can buy under the lease terms.
The market value also includes the net present value of the rent payable over the lease term.
How do you choose the best option?
Whether you opt for market value election or incremental basis depends on your financial situation and plans.
Market value election may be preferable if you plan to staircase quickly or want to simplify future transactions. On the other hand, an incremental basis may be beneficial if you prefer lower initial payments and plan to staircase slowly.
That being said, if you’re unsure about calculating SDLT on shared ownership, or how and when you should pay, you should speak to a professional in the first instance to ensure you make informed decisions and meet all legal requirements.
Are there any SDLT reliefs for shared ownership properties?
First-time buyers purchasing a shared ownership property with a full market value of £500,000 or less might be eligible for first-time buyer relief. This relief can reduce or eliminate the SDLT on your initial share.
When is SDLT due for shared ownership properties?
For Market Value Election, SDLT must be paid within 14 days of completing the purchase of your initial share.
For Incremental Basis, SDLT must be paid within 14 days of each staircasing transaction.
How does SDLT apply to staircasing?
When you buy additional shares in your shared ownership property (staircasing), the method of SDLT calculation depends on your initial choice.
If you paid SDLT on a Market Value Election initially, you won’t have to pay any further SDLT on future purchases of shares, including staircasing to 100%.
If you pay SDLT on the initial share purchase, SDLT is payable on each additional share you purchase. When your total share exceeds 80%, SDLT is recalculated on the cumulative value of all shares purchased.
What if the property’s market value increases over time?
If you choose the market value election, the initial SDLT payment remains based on the original market value, even if the property’s market value increases.
For incremental basis payments, SDLT is recalculated based on the value of each new share at the time of purchase.
How can I get help with SDLT and shared ownership?
At Lawhive, our network of experienced property lawyers and conveyancers can help you understand Stamp Duty Land Tax for shared ownership properties and provide advice throughout your transaction.
For help and advice, contact our Legal Assessment Team and get a fixed fee quote for the services of a specialist lawyer.