Relevant to tax year 2020/21
How do UK landlords reduce Stamp Duty Land Tax?
Before we go into the detail of how many Stamp Duty Land Tax you can save, it is worth reading our other article that covers the basics. In the other article, we will look at the Stamp Duty Land Tax rates that will be applied to you as a UK landlord
Do you pay Stamp Duty Land Tax on land that you buy?
Stamp Duty Land Tax is charged as a percentage of the amount given for the property.
You pay SDLT when you buy a property or land. You may also pay SDLT when a property is transferred to you. This is whether or not the transaction involves payment of money and/or non-monetary consideration. Monetary consideration includes goods, services or the assumption of financial liabilities. The total amount on which SDLT is payable is known as the ‘chargeable consideration’.
Stamp Duty Land Tax is usually paid to HMRC within 30 days of the property purchase. Conveyance solicitors will usually request the payment of Stamp Duty Land Tax as part of the completion process.
Obtaining an inherited property – mitigate the issue of 3% SDLT surcharge for three years
If you inherit a property through a trust the 3% SDLT surcharge may be ignored on this and subsequent property transactions. This is for the period of three years from the date you inherited property. This is provided that [Para 16(2)] provided that::
- The beneficiary becomes a joint owner of the interest by inheritance
- Their interest, combined with any spouse or civil partner’s interest does not exceed 50% of the major interest bequeathed
Are there ways to avoid the 3% Stamp Duty Land tax surcharge?
- Parents buying properties for their children can set up trust structures so the child is a beneficiary of a trust, meaning they won’t have to pay the extra tax.
- Landlords who expect to miss the deadline but don’t want to abandon the sale are negotiating with sellers to arrange to split the extra tax cost between them.
- Investors who complete transactions now to beat the tax change are allowing sellers to stay living in the property until they find a new home.
- Move into one of your property investments and announce that it is your primary residence/home. This may then be sold in the future once you are tired of the property. This will have two benefits 1) you will reduce Capital Gains Tax (CGT) on the asset disposal and 2) mitigate the 3% SDLT charge. Please remember to change the mortgage before moving back into the property.
How is the 3% Stamp Duty Land tax surcharge calculated?
If you buy a property for £90,000 then you will pay 3% on the £90,000 and will cost you £2,700 in SDLT.
If you purchase a property for £300,000 the new SDLT implications are a lot more significant.
£0 (£0 – £125,000 at 0%)
£3,750 (£125,000 to £250,000 at 3%)
£3,750 (£250,000 to £300,00 at 5%)
This gives rise to a SDLT charge of £7,500
£9,000 = (£300,000 at 3%)
Total = £16,500
You can see from this example how a property valued at £300,000 will now be liable to a SDLT charge of more than double the normal cost if it is a second property.
Reduce Stamp Duty Land Tax on chattels (fixtures, fittings and furniture)
The chargeable consideration is simply the purchase price. The Stamp Duty Land Tax is on the bricks and mortar of the property. This means that the value of carpets or furniture which are not integrated into the building is excluded from the calculation. These items are called chattels and must be identified in the buying process. The solicitor will need a signed itinerary of items and associated cost from the seller.
Sarah is buying a property with a value of £350,000 as a buy to let investment. The Stamp Duty Land Tax charge is calculated as:
£350,000 purchase price
£7,500 Stamp Duty Land Tax banded rates
£10,000 3% Stamp Duty Land Tax surcharge
£17,500 total Stamp Duty Land Tax charge
Let us suppose the seller was to leave the furniture, curtains, carpets and other fixtures. The reason why people may leave such items in a property is that they may be moving
– into a smaller house
– into a care home
– to a new home that already has been fitted out
Example of how to reduce SDLT when you identify chattels
Sarah walks around the property and agrees to dispose of these items for the seller to save them time. They agree that the value is circa £20,000. The bricks and mortar value of the property is decreased by this amount. Stamp Duty Land Tax is now recalculated as
£330,000 purchase price
£6,500 Stamp Duty Land Tax banded rates
£9,900 3% Stamp Duty Land Tax surcharge
£16,400 total Stamp Duty Land Tax charge
Admittedly the Stamp Duty Land Tax saving of £1,100 is not ground breaking but as the supermarket says “every little helps”.
Stamp Duty Building a new house
Stamp Duty Land Tax is based on non-residential rates when building a new house, per HMRC’s website. This is because there is not a residential building on the land at the point of purchase. This also means that the 3% Stamp Duty Land Tax surcharge does not apply. Again, because it is not residential at the point of purchase. This makes it worthwhile for investors and property developers to consider the option of “build to rent”
Use averaging to reduce Stamp Duty Land Tax
If you have the opportunity to buy a block of flats that is a freehold or leasehold with less than 21 years left then you can average the values of each dwelling to reduce Stamp Duty Land Tax.
Here are some examples of how you can do this
Example of how Stamp Duty Land Tax averaging is applied:
The freehold of a new block of 20 flats is purchased for £2.5 million. There is no head lease and none of the flats is subject to a long lease.
The transaction is a relevant transaction for the purposes of the relief as it involves the acquisition of more than one dwelling. For instance, a property that contains 20 flats. The freehold is treated as if it were interested in the individual dwellings. The chargeable consideration divided by the number of dwellings is £125,000. This is below the normal SDLT threshold but the minimum rate of tax under the relief is 1%.
The tax due is therefore 1% of £2.5 million = £25,000.
Another example of how Stamp Duty Land Tax averaging is applied:
The freehold of a block of 10 flats is purchased for £1.4 million. There is no headlease but five flats are let on 99-year leases.
The transaction is a relevant transaction for the purposes of the relief as it involves the acquisition of more than one dwelling. An example is a property investor that is looking to buy five untenanted flats.
Reduce Stamp Duty Land Tax by purchasing a mixed use or commercial property
John buys a shop with a flat above and pays £160,000. He thought that there were two properties and that he could divide the value between the residential element and the shop. This, in his mind, would mean there would be no SDLT to pay, happy days.
Sadly, upon purchasing the property he gets a nasty surprise when his solicitor tells him about a SDLT charge on the £160,000 purchase price — of 1%, which is £1,600.
Let’s look at another example. Let’s say John buys a freehold commercial property for £275,000. In this case the SDLT he owes is calculated as follows:
– 3% of £275,000 = £8,250
– Total SDLT = £8,250
Stamp Duty Land Tax mitigated through a gift of property
SDLT does not usually apply if the property is given and received purely as a gift and there is no chargeable consideration.
Here are some examples of how gifting properties may relieve the SDLT pains:
A father gifts a property worth £200,000 to his son for no monetary consideration. There is no mortgage on the property. The transfer in this instance is not notifiable as there is no chargeable consideration.
A mother gifts a property worth £200,000 to her daughter for no monetary consideration. There is however a mortgage on the property of £180,000 at the date of the transaction and the daughter assumes responsibility for that mortgage. Stamp Duty Land Tax (SDLT) is due at the rate of 1% on that outstanding mortgage sum. This transaction is notifiable.
Reduce Stamp Duty Land Tax considerations when going through a divorce
Certain transactions made in connection with the ending of a marriage or a civil partnership is exempt from SDLT.
These transactions are those made between the parties in the marriage or civil partnership as a result of
- certain types of court order
- an agreement between the spouses/partners in contemplation or in connection to the dissolution or annulment of their marriage or civil partnership
- their judicial separation or a separation order
The exemption is not available if the transaction involves someone other than the spouses or civil partners.
Stamp Duty Land Tax considerations on death
A transaction following a person’s death that varies a disposition. This is whether it is effected by will or under the law relating to intestacy. It is exempt from charge if the following conditions are met
- the transaction is carried out within the period of two years after a person’s death
- no consideration in money or money’s worth other than the making of a variation of another such disposition is given for it
This exemption applies whether or not the administration of the estate is complete or the property has been distributed in accordance with the original dispositions.
Buying property portfolios in a limited company to reduce Stamp Duty Land Tax
SDLT is charged on land and property. Buying shares in a company attract a different level of tax with Stamp Duty (SD) at 0.5%, which is considerably less than if you purchased several properties from an individual as you would have had to pay the normal scaled level of SDLT, plus the 3% surcharge.
So if you are looking to buy properties ensure that you buy the company that holds the properties to take advantage of the different stamp duty levels.
Once you have identified a company to purchase then you will need to buy the company in your own name or have it as part of your group of companies. You will need to complete a stock transfer form to ensure that the ownership changes hands.
And, of course, having properties in a limited company has the added advantage that you can offset all of your mortgage interest costs against your property income, which as a higher rate taxpayer you will soon not be able to do.
SDLT comparison: buying a property against buying a company
John is looking to buy a property investment for £250,000. He is speaking with one landlord about buying the property that is held in a limited company. He is also offered to buy the limited company instead.
If he were to buy the property from the company then the SDLT charges would apply
£250,000 purchase price
£2,500 SDLT banded rates from the above table. The first £125,000 is not subject to SDLT. The second £125,000 is taxed at 1%
£7,500 3% SDLT surcharge tax rate
£10,000 total SDLT for buying a property investment with a value of £250,000
If John were to buy the company he would save a significant amount of SDLT.
£250,000 market value of the property
£150,000 mortgage on the buy to let investment properly within the company
£100,000 net asset value of the company
The Stamp Duty (SD) rate is 0.5% of the £100,000. The SD rate is £500.
John would save an incredible £9,500
ATED tax charges when buying residential property investments in a limited company
It was suggested that properties valued over £500,000 would be subject to Annual Tax on Enveloped Dwellings (ATED) when you buy a residential property into a limited company. This does not apply provided that the property is rented out. You will need to complete a form Annual Tax on Enveloped Dwellings (ATED): Relief Declaration Return to let HMRC know that the property is rented and that ATED should not be applied.