Commercial property stamp duty: How Budget 2016 affects your purchase

The chancellor’s decision to introduce “a slice instead of a slab” approach to commercial property stamp duty will help those buying lower value properties, but could penalise those involved in higher value purchases, as Harrison Drury explains.

George Osborne’s decision to extend his stamp duty land tax reforms to the commercial sector was one of several surprises in budget 2016.

The chancellor scrapped the “slab” system for stamp duty land tax on residential property in the Autumn Statement of 2014 and those changes already apply. The changes to stamp duty on commercial property will apply from midnight tonight (March 17).

What does the chancellor’s “slice, not a slab” approach mean?

It means stamp duty land tax on commercial properties will now work like income tax, so rather than paying the same tax rate on the whole value of the property, depending on which price bracket it falls into, the rates will only apply to the portion of the price that falls into it.

Previously, paying just £1 more on a property price could land you with a stamp duty bill thousands of pounds higher because it fell into a higher bracket.

What are the new stamp duty rates for commercial property?

The new stamp duty land tax rates for commercial property will be 0% on the price between £0 and £150,000; 2% between £150,001 and £250,000; and 5% above £250,000.

As an example, a £4m freehold purchase under the old stamp duty rules would have resulted in tax of £160,000 (£4,000,000 x 4%). Under the new rules, the stamp duty tax liability will now be £189,500 (5% on the consideration above £250,000 plus £2,000).

What’s the impact on my property purchase?

In short the changes will increase stamp duty on the highest value commercial property, while cutting it lower down. So a boost for small businesses, but a setback for larger businesses and property investors.

From our calculations, if you are making a freehold purchase on a commercial property worth under £1,050,000 you will actually make a saving on stamp duty compared to the old system. For any property deals where the consideration is above this figure you will pay more stamp duty.

What impact is this likely to have on investment and development?

As activity increases in the region this may impact on the decision to invest and also the structure of the deal, for example whether this becomes a share sale, as opposed to asset sale.

While small business groups have welcomed the changes, the British Property Federation (BPF) called it a raid and that commercial property investment would slow, potentially affecting development in places like the Northern Powerhouse.

Mr Osborne expects the reforms to raise £500m a year and says only 9% will pay more while over 90% will see their tax bills cut or stay the same.

What about leasehold transactions?

Stamp duty rates for leasehold rent transactions will also change, with a new 2% stamp duty rate on leases with a net present value over £5m.

If you are looking to purchase a commercial property and need legal advice contact Harrison Drury on 01772 258321.