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Reservation agreement and SDLT

Introduction

When purchasing a property, buyers need to be aware that Stamp Duty Land Tax (SDLT) may be due and payable to HMRC after completion. SDLT is calculated as a percentage of the final purchase price.

The SDLT rates are generally higher for residential properties than for non-residential properties, especially with the additional 3% surcharge and the 2% surcharge for non-UK residents buying UK residential properties from 1 April 2021. This often forces buyers of residential properties to negotiate aggressively to afford their dream home and reduce their SDLT liability.

While there are some SDLT reliefs available for residential property purchases, these depend on specific circumstances. We have previously discussed multiple dwellings relief and purchasing dilapidated properties. Here, we examine the impact of entering into a reservation agreement with the vendor on the SDLT payable.

Reservation Agreements in Auctions

Reservation agreements are common in property auctions. Typically, the highest bidder pays a small percentage of the final bid amount as a reservation fee. This fee provides exclusivity and sets a timescale for completing the transaction.

In this scenario, the reservation fee is not credited against the total purchase price but is shared between the estate agent/auctioneer and associated parties. From an SDLT perspective, no tax is due on the reservation fee; tax is only due on the actual completion price.

Reservation Agreements for Off-Plan Purchases

Reservation agreements are also prevalent in off-plan purchases, where residential property developers sell to buyers before construction begins.

In this context, the reservation agreement allows a buyer to pay a reservation fee to the developer in exchange for reserving a plot of land until a specified date and at a pre-agreed price. After entering into the reservation agreement, the property is built. Once finished, contracts are exchanged, and the buyer pays the balance of the pre-agreed purchase price to complete the transaction. Typically, the reservation fee is credited against the pre-agreed purchase price.

Since this involves purchasing a residential property, the residential SDLT rates usually apply. However, if certain conditions are met, the transaction may qualify for the lower non-residential SDLT rates. These conditions include:

  • The transaction must be at an arm’s length price.
  • The reservation agreement must be genuine and legally enforceable.
  • Construction of the property must not have commenced at the date of the reservation agreement.

Additional conditions may also apply to each transaction to qualify for non-residential SDLT rates.

Example

Consider a residential property completed by a developer with an exchange date of 1 April 2021. The agreed completion price is £750,000, and the purchaser already owns a private residence, intending to use the new purchase as an investment. The SDLT liability is calculated as follows:

Purchase Price Bands (£)Percentage Rate (%)SDLT Due (£)
Up to 125,00033,750
125,000 to 250,00056,250
250,000 to 925,000840,000
925,000 to 1,500,000130
1,500,000+150

Total SDLT due: £50,000

Now, consider a scenario where a reservation agreement was entered into before construction began. Depending on the conditions, the SDLT liability might be calculated as follows:

Purchase Price Bands (£)Percentage Rate (%)SDLT Due (£)
Up to 150,00000
150,000 to 250,00022,000
250,000+525,000

Total SDLT due: £27,000

This results in a reduction in stamp duty liability of £23,000 compared to the initial scenario.

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