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Stamp collection

I am about to buy a local business with residential property attached and will rent out both to tenants. I hear that stamp duty has changed but what else do I need to be aware of?

Residential property continued to grow by around 15.4 per cent during 2003 and the yields from certain commercial rents remain attractive. Moving into 2004, there are clear signs of a slowdown, particularly in the South-east, but I assume you have taken the time to ensure your purchase is commercially sound.

Buy-to-let loans are underwritten on the basis of the potential rental income and not determined by your income. You will be required to place a bigger deposit than on a property you are buying to occupy yourself.

You are right that stamp duty has been replaced by stamp duty land tax. The tax thresholds remain the same but the move is a response to homebuyers paying over the odds for fixtures and fittings in return for the sale price being kept below a stamp duty threshold. Homebuyers are required to complete a self-assessment form called the land transaction return.

Stamp duty land tax is charged on the rental element of new leases (lease duty) by reference to the net present value of a lease. The Finance Act set a threshold of £150,000 for non-residential and mixed-use leases and £60,000 for residential leases. The charge is set at 1 per cent of the amount by which the NPV exceeds the threshold.

Once stamp duty land tax has been paid, the tenant or purchaser must in certain situations continue to monitor the position and make further returns to the Inland Revenue, in contrast to stamp duty which was a one-off charge.

Property Stamp

purchase duty

Up to £150,000 0%

£150,000-£250,000 1%

£250,000-£500,000 3%

£500,000+ 4%

If you are buying a range of shops that are valued at, say, £450,000, the stamp duty land tax does not operate on aggregate basis. Therefore, you may be able to have three titles at less than £150,000 and pay no stamp duty land tax. However, it is not possible to avoid the tax by granting a series of short leases, each with a rent falling below the threshold. Where leases are granted in a pre-ordained series, that lease may be linked together so as to trigger the requirement for a land transaction return.

The charge on lease rents – which works out far higher than stamp duty – is an upfront cost for tenants that has to be paid within 30 days after the lease starts and will hit start-up costs and cash flows. Certain retailers will be particularly badly hit due to the number of multiple high-rent leases they sign.

The rules governing stamp duty land tax are likely to continue to be developed as it was introduced at very short notice, with the Government continuing to make amendments right up to the December 1 deadline. It is likely that the new tax will take some time to bed down in practice so specific legal advice should be taken.

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