When buying a new build property, the Stamp Duty Land Tax (“SDLT”) payable can often be a deterrent for purchasers thus, it is not uncommon for developers to sell a vacant plot of land and simultaneously enter into a build contract for the construction of the dwelling which, can provide a substantial SDLT saving.
For example, Wendy the builder owns a development site with planning for 10 houses. Bob wants to buy one of the homes and Wendy offers the following two options:
- pay Wendy £750,000 once the house is completed; or
- buy the vacant plot land from Wendy for £200,000 and then pay Wendy £550,000 after the purchase of the plot by instalments throughout the build process.
Assuming Bob does not own any other properties, and this will be his main residence, this would result in Bob having an SDLT liability of £27,500.
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.
The value of the bare land (in our example above, £200,000) must be a “just and reasonable” valuation thus, it is important that Wendy is able to offer Bob evidence for the valuation given.
If no construction works have begun and the current/past use is non-residential, Bob’s SDLT liability could be as little as £1000, giving a potential saving of £26,500.
If the plot of land is deemed residential due to its current or past use, the SDLT liability would be £1500 giving a potential saving of £26,000.
To maximise the SDLT savings available under Option 2, Wendy would need to make sure that no building works have begun at the time the plot of land is sold to Bob. 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 so, much earlier in the process. Given the potential savings, this does not deter many people but it is important to bear in mind in terms of budgeting.
Where a plot purchaser owns other residential dwellings or, where they are purchasing the new build property but do not intend to occupy it as their main dwelling, the SDLT surcharge rates will apply. Using this example, if Bob pursued Option 1 but he was buying the new build as a holiday home for his family, on a purchase price of £750,000, his SDLT liability would be £50,000. However, if he pursued Option 2 and no building works had started, the surcharge would not apply despite the fact it was not intended to be his main residence and his SDLT liability would remain £1000. In this instance, the SDLT saving would be £49,000.
If you are not a cash purchaser, it is important to make your lender aware of your intention to purchase via a Build Contract as not all high street banks will offer lending on this basis.
Nevertheless, for those with access to development finance, the advantages in terms of the tax savings set out above are clear.
The additional area of specialist legal expertise that is required when pursuing Option 2 (given its particular development and construction context) is among the niche offering included within the expert team here at Ellisons; our commercial property offering includes the benefit of experienced construction solicitors who are able to ensure that the build contract is drafted to protect your interests.
Key issues which will need to be considered and agreed between the developer and the purchaser do not just include the price, timing and quality of the works, they will also need to consider the following:
- What is the scope of the contracted works? Is any design included? If so, detailed thought needs to be given to the design obligations.
- What pricing model have the parties agreed i.e. is the price fixed, a lump sum, remeasurable?
- What obligations will the contract price for the contracted works include/exclude?
- By when are the contracted works to be completed? Further, how will completion 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?
- How will divergences/difficulties be resolved so that the project can remain on track?
- 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?
The above list of points to consider is not exhaustive and each development will differ; every project demands a tailored approach and fortunately this is something which we at Ellisons are able to supply by devoting to your project specialists not only in commercial property but also in the drafting, negotiation and administration of construction contracts so we can help you to ensure that your interests are always protected appropriately.
For more information, please contact Bethan Williams.