Land Transaction Tax – Relief for the ‘Granny Annexe’
Author: Shona Humphreys (CTA) Senior Tax Advisor at LHP
Restrictions on movement during the COVID-19 pandemic and the formation of support bubbles may (or may not!) have made you want a close relative living nearby. With many people relocating to larger, more rural properties, awareness of the Land Transaction Tax relief available when a property is purchased with a ‘granny annexe’ is important.
Land Transaction Tax (LTT) is paid on the purchase of residential properties in Wales; the amount payable (sometimes nothing at all) depends on the purchase price and whether the purchaser already owns another residence.
Since 2016, buyers already owning another residence have paid a surcharge on the purchase of an additional dwelling, currently 4% on top of the standard rates. This surcharge would usually be payable on the purchase of a house with say, a garage converted into a one-bed dwelling, were it not for Multiple Dwellings Relief (MDR).
MDR allows the buyer to calculate the LTT payable by dividing the total purchase price by the number of dwellings being bought, and then applying the relevant LTT rates. Not only does MDR let the buyer avoid incurring the surcharge for additional dwellings in this instance but can reduce the overall charge by paying LTT on the average price of each dwelling.
Take for example a 4-bed property with an outbuilding (within the grounds of the main house) converted into a dwelling, with a total purchase price of £400,000. The main residence is valued at £300,000 and the converted dwelling at £100,000. Assume that a prospective buyer has sold their former home, and this is their replacement. Without MDR, LTT of £4,950 would be payable on the main residence and £4,000 (total £8,950) on the outbuilding, thanks to the additional dwellings surcharge.
However, by claiming MDR the buyer can pay LTT on the average price of both dwellings (£200,000) and avoid the additional dwellings surcharge, resulting in a charge of £1,400 on a total purchase price of £400,000. But, where MDR is claimed you must pay at least 1% of the purchase price in LTT, so in this example on a property costing £400,000, LTT would be payable at £4,000. Quite a saving!
There are conditions, of course. The property must be separate and independent accommodation, and subsidiary to the main residence. It will be subsidiary if it’s within the grounds of the main property, for example. The main property must also account for at least two-thirds of the total consideration paid, calculated on a just and reasonable basis.
Contact our team of tax specialists if you’re relocating and need advice prior to committing to a property. With over 85 years experience and five offices across South Wales you are in safe hands.