Reduce Property Gains Tax, Property Investors

Stamp Duty Land Tax for Property Investors

simon

Simon Misiewicz

27th November 2021

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.

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

Stamp Duty Land 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 £125,000 Zero
From £125,001 to £250,000 2%
From £250,001 to £925,000 5%
From £925,001 to £1.5m 10%
Over £1.5m 12%

£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 that will be applied to a property value of £10,000

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SDLT higher rate -  3% surcharge from November 2015

Anyone buying a second residential property will soon have to pay an additional 3% on any residential property with a value of £40,000 or more. Please note that the 3% extra SDLT is in addition to the SDLT rates.

The 3% SDLT higher rate in England or Northern Ireland also applies to anyone that wishes to buy a residential property within a limited company.

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 £150,000 Zero
Over £150,000 to £250,000 1%
Over £250,000 to £500,000 3%
Over £500,000 4%

You are therefore going to be paying more 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. On commercial properties, you will pay the % on the full amount once you go over certain values as shown above.

The rules for commercial properties are also applied if you are buying mixed-use properties, for example, 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 SDLT calculations for commercial properties are very different to residential properties?

Flats above shops or have a residential dwelling with offices

We have recently written an article where you can use the Multiple Dwellings Relief, as shown in this article, 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 Stamp Duty Land Tax.

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

Claim back overpaid Stamp Duty Land Tax

We can help you get an SDLT REFUND from HMRC if you have purchased a property within two years and believe that you have overpaid Stamp Duty Land Tax

No win no fee

SDLT Refund

Claim 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 Land Tax calculation

£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.

Buy a property limited company, not individual properties rates

This article discusses all the different types of tax that you need to be aware of as a UK landlord. You may also be interested in reasons why people should and should not use a limited company to buy a property.

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.

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 property 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

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.

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.

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.

0% SDLT Acquisition by a house-building company from individual acquiring new dwelling

Property developers that carry out property exchange will not need to pay SDLT.  Stamp Duty for developers can be avoided. Sheila is looking to sell her house and she decides to buy a new home from a property developer. They eventually are to do a part exchange on an old-for-new basis. Technically this allows property developers to swap houses without paying stamp duty.

The property developer will not need to pay SDLT on the purchase of the older property. This is provided the following conditions are met:

The individual must

– occupied the old dwelling as their main residence in the period of two years of  acquisition

– acquires a new dwelling from the house-building company (property developer)

– intends to occupy the new dwelling as their only or main residence

– each acquisition is entered into in consideration of the other

– the area of land acquired by the house-building company does not exceed the permitted area

The amount of chargeable consideration is the difference between the market value of the permitted area and the value of the old dwelling. The value of the old dwelling includes the building and land combined.

0% SDLT Acquisition by property trader from an individual where the chain of transactions breaks downF

Now let’s imagine that someone is looking to sell their house. It is not that difficult to imagine many of you may have been involved in a property purchase transaction that subsequently fails.

The seller may have already identified a property to buy and will likely to feel dissatisfaction with the whole process.

If a property developer was to hear about the broken-down transaction and continue to buy it, then there is no SDLT charge. This is provided that the below conditions are met as outlined in legislation:

– the individual has made arrangements to sell the old dwelling and acquires another dwelling

– the arrangements to sell the old dwelling fails

– the acquisition of the old dwelling is made for the purposes of enabling the individual’s acquisition of the other dwelling to proceed

– the property trader makes the acquisition in the course of a business that consists of or includes acquiring dwellings from individuals in the above circumstances

In addition, the individual must

– occupied the old dwelling as their main or only residence at some time in the two years prior to the date of purchase by the property trader

– intends to occupy the other dwelling as their only or main residence

– the area of land acquired by the property trader does not exceed the permitted area

0% SDLT Acquisition by property trader from personal representatives

The legislation covers a scenario where a property developer purchases a dwelling from personal representatives. The purchase will be exempt from Stamp Duty Land Tax if all of the following conditions are met:

– the purchase is in the course of a business  consisting of  dwellings from personal representatives

– the deceased individual occupied the dwelling as his main or only residence at some time in the two years ending with the date of his death and

– the area of land acquired does not exceed the permitted area

ICTA88/S839 applies for the purpose of determining whether a company is connected with a house-building company a property trader means a:

 – company

– limited liability partnership

– a partnership whose members are all companies that carry out the business of buying and selling properties. The relief is not available to sole traders, individuals or individuals in partnership. The property developer should complete a land transaction return to claim the relief available and the consideration paid should be shown at Box 10 of form SDLT1.

What is the Stamp Duty for second homes?

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.

Reclaim the 3% SDLT higher rate on a second home

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 (ie 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.

If 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 ago, you can still claim back the 3% SDLT surcharge by using a solicitor or the Optimise filing service.

The different 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 rates of Stamp Duty Land Tax.

Book a consultation with one of our tax accountants to discuss how to avoid Stamp Duty further.

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.

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