Reduce Property Gains Tax, Property Investors

Stamp Duty Land Tax for Property Investors

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Simon Misiewicz

27th November 2020

What is Stamp Duty Land Tax in England or Northern Ireland?

You may be interested in our main article “buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord.

Stamp Duty Land Tax (SDLT) is a charge that applies when purchasing land. You can buy a movable building but not pay SDLT. It is the land, not the building that will cost you SDLT. SDLT needs to be paid to HMRC within 14 days of the purchase. Most conveyance solicitors will want you to pay this money over to them sooner to prevent the risk of non-payment. The SDLT liability will be documented on the SDLT1 form, which will be prepared by the conveyance solicitor.

It is not possible to avoid Stamp Duty land transaction tax without the aid of an SDLT refund tax specialist. That said it is possible to learn how to avoid stamp duty on second homes that can then be implemented with the aid of a landlord accountant at Optimise Accountants.

Please note that you do not pay Stamp Duty Land Tax on a property worth less than £40,000. This article is relevant for first time home buyers, people buying a second home, property investors, property developers and those that have a holiday home or holiday let.

How much Stamp Duty Land Tax is payable when buying a residential buy to let property?

Residential property Stamp Duty land transaction tax is a banded rate in England or Northern Ireland. It is a scaled charge. If you buy a property for £300,000 then the following Stamp Duty Land Tax charge will apply

Up to £125,000Zero
From £125,001 to £250,0002%
From £250,001 to £925,0005%
From £925,001 to £1.5m10%
Over £1.5m12%

£0 – 0% X £125,000

£2,500 – 2% X £125,000 (£250,000 less the previous SDLT band of £125,000)

£2,500 – 5% X £50,000 (£300,000 less the previous SDLT band of £250,000)

£5,000 is the total SDLT charge applied to a property value of £10,000.

Albeit holiday lets or a holiday home may be considered commercial in some nature, it is still charged at residential rates for Stamp Duty Land Tax purposes.

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What is the Stamp Duty for second homes?

Residential property Stamp Duty rates are different depending on whether you are buying a second home in England & Northern Ireland, Wales or Scotland.

The amount of Stamp Duty payable is also different depending on the purchase price of the property.

From 1st July 2021, the Stamp Duty threshold will reduce from £500,000 to £250,000 on any residential property purchased in the UK until 30th September 2021.

From 1st October 2021, the threshold will revert to £125,000.

If you sell your own home and buy another home, you will not have to pay the additional 3% on that property. We advise many of our clients to sell their current home to a third party or to their own limited company to avoid this SDLT higher rate.

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How to avoid stamp duty on second home & Reclaim the 3% SDLT higher rate on a second home

How to avoid residential property stamp duty on second homes

You may be asking, “how to avoid stamp duty on second homes?” There are several ways that you can avoid stamp duty on second home:

– Buy a house with a value less than £40,000 as this will not be subject to the 3% Stamp Duty higher rate

– Buy a commercial property that may be converted into a residential use property. I appreciate this is a lot of hard work but wait a second. Please take a look at dentists and where they work. Many dentists work in a building that looks like a big house. That is because it was a big house. You could buy this without the Stamp Duty 3% higher rate and lower residential banded rates. You can then convert this into a residential property. This is done by many property developers supported by property developer accountants in Optimise Accountants.

– Buy a caravan, motor home or a houseboat. These types of properties are not for residential use. This means they will not be subject to the usual 3% SDLT higher rate. The reason for this is that HMRC states that they are moveable homes. Go figure.

– One of the most popular ways that many of our landlords avoid stamp duty on second home is to buy a property for their children. Many parents pay for their children to attend university. One of the costs that may be avoided is rent to other landlords. This is because a home could be purchased for the child, and the parent acts a the mortgage guarantor. The added bonus is that your child can then earn money from other housemates to pay for their education rather than the parent. Bonus!!

How to reclaim overpaid 3% higher rate SDLT

The 3% SDLT higher rate you have paid on purchasing a replacement home may be claimed back if you sell the previous home between 0 to 36 months after buying your replacement home by completing an HMRC form

You can claim the 3% SDLT surcharge back yourself (i.e. not involve solicitors) provided that you have sold (the sold date is usually the date that the purchase completed – if you’re unsure, please check with your agent or solicitor if one acted for you) your previous home within 3 years of purchasing your replacement home and:

– The sale of the previous home is less than 12 months after the purchase of the replacement home, or

– The filing date on the SDLT return for the replacement home is less than 12 months ago, whichever comes later. Suppose your previous home sale is more than 12 months but less than 36 months after your replacement home purchase, and the SDLT Form filing date on your previous home is more than 12 months ag. In that case, you can still claim back the 3% SDLT surcharge by using a solicitor or the Optimise filing service.

– This may be an obvious statement to make but first time home buyers do not pay the extra 3% Stamp Duty.

– Couples can buy a home each and not be subject to the 3% Stamp Duty. HMRC state that If you’re married or in a civil partnership. That said the 3% higher rate will not apply if you are a couple but not married or in a civil partnership. This is a great way of how to avoid stamp duty on second home.

The rules apply to you both as if you were buying the property together, even if you’re not.

The different residential property Stamp Duty rates for property investors to bear in mind forms part of a detailed article we’ve written as a guide.

HMRC has also produced clear guidance on higher Stamp Duty Land Tax rates.

Have you overpaid Stamp Duty Land Tax?

We can help you recover overpaid SDLT. Please tell us about your overpayment to see if we can get it back from HMRC

Complete the form

 

Stamp Duty Land Tax rates for commercial properties 

If you are buying commercial properties, then you will pay SDLT at different rates, as follows in England or Northern Ireland:

Up to £150,000Zero
Over £150,000 to £250,0001%
Over £250,000 to £500,0003%
Over £500,0004%

Therefore, you will be paying less SDLT on commercial buildings than you would residential properties.

Whenever you buy residential properties, you will pay the % figure provided in my article, with the amounts based on a sliding scale.

You might think that the same applies to commercial properties. The harsh reality is that this is not the case. You will pay the % on the full amount on commercial properties once you go over specific values, as shown above.

The rules for commercial properties are also applied if you buy mixed-use properties, such as flats above offices or shops.

Can you see that you will pay more SDLT on commercial properties than you would residential?

Do you understand that the SDtamp Duty calculator workings for commercial properties are very different to residential properties?

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Flats above shops or have a residential dwelling with offices

We have recently written an article where you can use the SDLT relief for multiple dwellings relief. This is whilst removing the 3% SDLT additional rate. This is relevant where you buy multiple residential properties that also has a commercial element. This means you do not pay the 3% SDLT rate when claiming MDR in England or Northern Ireland

Identify chattels to help you reduce tax

HMRC defines the word ‘chattel’ as a legal term meaning an item of tangible, movable property – something you can both touch and move. Your personal possessions will normally be chattels.

Including:

– items of household furniture

– paintings, antiques, items of crockery and china, plates and silverware

– items of plant and machinery not permanently fixed to a building (Moveable kitchen and bathroom units)

Chattels are not fixed or a part of the land that it sits on. It may be moved from one place to another. As such these items are not subject to residential property Stamp Duty Land Tax.

If you want to know more then please read our “buy to let tax tips for UK landlords” article

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Claim SDLT relief for Multiple Dwellings Relief (MDR)

Multiple Dwellings Relief is an opportunity to reduce SDLT when buying residential buy to let properties. In order for you to claim a discount, you need to purchase two or more properties from the same vendor. This is commonly known as a linked transaction. There is a linked transaction as there are multiple land transactions taking place with the same buyer/seller.

Multiple Dwellings Relief is an opportunity to reduce Stamp Duty Land Tax when buying residential buy to let properties. In order for you to claim a discount, you need to purchase two or more properties from the same vendor. This is commonly known as a linked transaction. There is a linked transaction as there are multiple land transactions taking place with the same buyer/seller.

HMRC defines a linked transaction  “When 2 or more property transactions involve the same buyer and seller, they count as ‘linked’ for SDLT. HMRC may count people connected to a buyer or seller as being the same buyer or seller”.

HM Revenue Customs counts transactions as linked if:

– there’s more than one transaction

– the transactions are between the same buyer and seller or between people connected with either of them

– the transactions are part of a single arrangement or scheme or part of a series of transactions

Recently the have been some changes to the SDLT for MDR and the 3% SDLT additional rate.

These changes have been put in place by the HMRC or the Her Majesty’s Revenue and Customs which collects revenue on behalf of the UK government.

The new changes which were rewritten in April 2020 state that the SDLT 3% higher rules do not apply to mixed properties. They have been rewritten to reflect that the 3% higher SDLT will not affect you if you own a property that has both residential and non-residential elements.

You can also still use Multiple dwelling relief to decrease the tax burden of the property, which has a residential element.

Let us take a look at an example to see how Stamp Duty Land Tax and in particular the 3% SDLT additional rate may be significantly reduced.

£350,000 purchase value of a property. We do not know too much as the property apart from it has a few ASTs. The solicitor may therefore assume, incorrectly, that the property is residential in nature. The Stamp Duty Land Tax is calculated by the solicitor as follows

£7,500 SDLT based rate

£10,500 3% SDLT higher rate (3% of £350,000)

£18,000 total SDLT liability when purchasing a residential property with a value of £350,000 (ignoring the Rishi Sunaks winter holiday for SDLT given that this ended in April 2021)

When we look further into the property we understand that the property has 5 bedsits. The property is all on one title, nevertheless, the five bedsits qualify for Multiple Dwellings Relief (MDR). Each bedsit has an individual value of £70,000. The £70,000 property value is less than £125,000 so no SDLT banded rate will apply.

We can now revise the Stamp Duty calculator workings:

£3,500 SDLT based rate (please note that there is a 1% minimum charge on the property value)

£10,500 3% SDLT higher rate (3% of £350,000)

£14,000 Total SDLT liability – SDLT banded rate and 3% SDLT higher rate

This is a nice £4,000 SDLT saving but there is more to come by asking much better questions of the buyer and seller.

We ask more questions only to find out that the five bedsits are on top of a commercial unit. This means that we can divide the £350,000 purchase price by its floor space as follows:

£250,000 for the five bedsits

£100,000 for the commercial unit beneath the five bedsits

£350,000 total purchase value

The £100,000 commercial valuation is below the £150,000 non-residential banded rate of Stamp Duty Land Tax. This means that no SDLT will be charged on this element.

This now leaves £250,000 to be taken into consideration for the solicitor when calculating the Stamp Duty Land Tax. Each flat will have an individual rate of £50,000

£2,500 SDLT banded rate with a minimum 1% charge for MDR

£0 3% SDLT higher rate as there is a commercial element. No need to apply the 3% SDLT additional rate to this transaction

£0 SDLT or the commercial element of the £1000,000

£2,500 total SDLT liability

As you can see the buyer could have saved £15,000 stamp duty land tax if the solicitor in question asked better questions. In order for you to benefit from SDLT relief for multiple dwellings, you ought to work with an SDLT tax specialist.

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Obtaining an inherited property

If you inherit 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 the 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

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.

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Stamp Duty Land Tax 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 a 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.

2% SDLT surcharge for Foreign investors buy UK property

The 2% SDLT foreign surcharge measure will apply to land transactions with an effective date of 1 April 2021.

Where contracts are exchanged prior to 11 March 2020 but complete or are substantially performed on or after 1 April 2021, transitional rules may apply. Transitional rules may also apply where a contract is substantially performed on or before 31st March 2021 but does not complete until 1st April 2021 or later.

Have you overpaid Stamp Duty Land Tax?

We can help you recover overpaid SDLT. Please tell us about your overpayment to see if we can get it back from HMRC

Complete the form

Can I claim Stamp Duty relief? 

Stamp Duty Land Tax relief is available under certain conditions, as is SDLT relief.

If you do not own any property but decide to purchase a buy to let property then you are not liable to pay Stamp Duty for second homes, because you would only own one property.

A first-time buyer can also claim SDLT relief. If you are a couple, both of you must be first-time buyers to benefit from first-time buyer SDLT relief. This is one good reason not to get married.

You will have to pay Stamp Duty if you have a share in another property, have inherited a property, or are buying a property with someone else who already owns a property.

Buyers are entitled to a Stamp Duty refund if they bought a second home and paid the 3% Stamp Duty charge, but sell their original property within three years. We have already discussed this at length above.

As far as paying Stamp Duty is concerned, the property you currently live in is considered by HMRC to be the main residence.

If you are not exempt from paying Stamp Duty on a second home, it is still possible to claim a Stamp Duty refund under the following circumstances:

– You sold your main residence within three years of purchasing the new one.

– You paid Stamp duty for the second home by mistake.

– You apply for the Stamp Duty refund 12 months after the filing date of your SDLT return.

– You apply for the Stamp Duty refund three months after selling your main residence.

If you wish to claim a Stamp Duty refund, tax details must be submitted to HMRC.

This can be done online, with the inclusion of details such as amount being claimed back, total Stamp Duty paid, address of the old main residence sold, and the address of the property for which you paid the additional SDLT charge.

HMRC has outlined Stamp Duty reliefs and exemptions, which is worth reviewing.

Some of these reliefs on Stamp duty are applicable for:

– Building companies buying an individual’s home

– Employers buying an employee’s house

– Local authorities making compulsory purchases

– Property developers providing amenities to communities

– Companies transferring property to another company

– Charities

– Right to buy properties

– Registered social landlords

– Crown employees

To find out more about Stamp Duty relief and SDLT refunds, speak to one of our property tax experts today.

Is stamp duty tax deductible?

As we can see from the above information that Stamp Duty Land Tax is a property purchase tax. The big question is this: Is stamp duty tax deductible?

Stamp Duty is tax-deductible but not against income tax. This is because Stamp Duty is a capital expense. Stamp duty tax deductible when the property is sold as it will increase the purchase cost of the property. This will decrease the gain and the CGT liability.

So, stamp duty is tax deductible but not immediately.

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