Stamp Duty - A Taxing Issue

The last year has seen a plethora of articles written about the introduction of the new Land Transfer Tax ("LTT"), the tax equivalent to Stamp Duty now payable on purchases of residential share transfer property. It has been argued by some that this tax has come at a bad time for those struggling to buy their home or climb the property ladder. However, behind the headlines lies the reality of the situation, namely that many sales of share transfer flats are in fact to "First Time Buyers" who will benefit from significantly reduced rates of LTT since the same concessions apply as to freehold transactions.

But just what are these concessions and most importantly, what are the rates and rules of Stamp Duty? Many clients are not aware of the basics and practitioners are accustomed to Stamp Duty questions arising almost before anything else when instructed to act for purchasers of residential property. The rates payable by such purchasers are contained in the relevant legislation, being the Stamp Duties and Fees (Jersey) Law 1998, (as amended) (the "Stamp Duty Law", which covers freehold purchases) and the Taxation (Land Transactions) Jersey Law 2009 (the "LTT Law", which covers share transfer transactions). Both Laws enable the States to amend the rates from time to time by way of passing Regulations. However, the average buyer will be less concerned with the relevant legislation and more concerned with the fundamental question always asked at the outset of any transaction: "How much do I need to pay in addition to the asking price in order to purchase my new home?"

The answer is this. The basic rates of Stamp Duty and LTT for the purchase of residential property are currently as follows:

If the value exceeds £50,000 but does not exceed £300,000 - £250 in respect of the first £50,000 plus 1.5% each £100 or part of £100 in excess thereof.

If the value exceeds £300,000 but does not exceed £500,000 - £4,000 in respect of the first £300,000 plus 2% for each £100 or part of £100 in excess thereof.

If the value exceeds £500,000 but does not exceed £700,000 - £8,000 in respect of the first £500,000 plus 2.5% of each £100 or part of £100 in excess thereof.

If the value exceeds £700,000 - £13,000 in respect of the first £700,000 plus 3% of each £100 or part of £100 in excess thereof.

There is an additional £50 registration fee in all cases and a £20 'Jurat' fee applicable to freehold rather than share transfer purchases (since you do not need to pass share sales through the Royal Court). It is the value of the property that is assessed, rather than the price, so transactions for an undervalue will incur Stamp Duty at the rate applicable to the open market value of the property.

It is important to remember that Stamp Duty or LTT is also payable on the amount of any mortgage taken out to finance the transaction (either by way of what is known as an “hypothec” over a freehold property or a “security interest” over the shares relating to a share transfer property). The Stamp Duty or LTT rate for such borrowings is generally 0.5% plus the £50 registration fee. Where a borrower is refinancing an existing loan a nominal rate of £50 is payable, plus 0.5% of any amount in excess of the original amount drawn under the loan. There is no registration or 'Jurat' fee payable on refinancing. However, this rate does not extend to refinancing of commercial property or investment property.

So what are the famous "First Time Buyer" concessions? The rate of Stamp Duty or LTT payable by First Time Buyers is significantly reduced, with purchases or borrowings for under £300,000 simply attracting the £50 registration fee (plus £20 ‘Jurat’ fee for purchases of freehold property) and nothing further. The First Time Buyer rates are subject to a cap and do not currently apply to purchases of property for a value exceeding £400,000. The rate of duty payable on purchases within the £300,000 - £400,000 band is nil in respect of the first £300,000 plus 1% of each £100 or part of £100 in excess thereof (Plus £50 registration fee and £20 ‘Jurat’ fee for freehold transactions). On borrowings by First Time Buyers in this price bracket the rate is merely nil in respect of the first £300,000 plus 0.25% of each £100 or part of £100 in excess thereof (subject to a minimum of £25).

Thus it can be seen that the difference is fairly substantial and indeed may make all the difference to those hoping to buy their first home on a limited budget. So exactly who is, or what is, a “First Time Buyer”? The criteria are fairly stringent. The purchaser must be residentially qualified to live in Jersey and must not have previously held or owned any property at all, either as a freehold owner, as an owner of shares entitling him or her to occupation of a dwelling, as a tenant under a contract lease or having owned property with or through another person or entity in any form of arrangement. A less widely known fact is that these criteria include the ownership of property outside Jersey too, so the concession truly does seek to help those who most need it.

Stamp Duty is also payable upon taking on a contract lease, sub-lease or licence to occupy premises (usually commercial property) as well as upon the transfer of or extension to such agreements. The amount of Stamp Duty payable is calculated by multiplying the annual rental (or licence fee) payable pursuant to the terms of the lease (or licence) by the number of years of the term, subject to a maximum of 21 years. The rate of Stamp Duty payable is currently 0.5% of the first £100,000 and 0.75% of the remainder of the quantum of these multiples. The rental (or licence fee) used for this calculation must represent the true market value, or else the deemed open market rental will be applied for the purposes of calculating the Stamp Duty due. In this spirit, predetermined rent reviews fixed by the terms of the lease (or licence) must be factored in to calculating the annual rental (and accordingly the Stamp Duty due) and therefore can be costly to the tenant in more ways than one. Interestingly, premiums and reverse premiums (i.e. financial inducements offered between the parties to the lease or licence) receive the same Stamp Duty rate as purchases of freehold property (see the chart above) rather than the rate applied to leases.

There are of course exceptions to the above and special rules and rates that apply to specific situations. For example special rates apply in respect of transfers of leases of dwelling accommodation which fall within the Building Loans (Miscellaneous Provisions) (Jersey) Regulations 1961. “J-Category” purchasers do not (at the discretion of the Registrar) have to pay Stamp Duty again upon obtaining their residential housing qualifications and transferring their property into their own name (unless the employer paid the Stamp Duty originally).

In summary there is more to the Stamp Duty Law and the LTT Law than meets the eye and the reader would be best advised to speak to a legal adviser in relation to any queries he or she may have.

The above is only a brief overview, for more information or to discuss any aspect of this article or to gain a quotation for any other property law advice, please contact Gavin Renault on +44 1534 676 983 who will be happy to help.