Relevant to tax year 2019/20
Your Stamp Duty Land Tax questions answered:
In this article we will attempt to answer your questions about Stamp Duty Land Tax:
– How much is stamp duty in the UK?
– Is there stamp duty on land purchase?
– Is stamp duty due on a gift of property?
– Can I claim back stamp duty?
– Is Stamp Duty Land Tax charged when getting a divorce?
Whilst you are reading this article you may wish to read our page on the subject of “buy to let tax for UK landlords” where we discuss all the different types of tax that you need to be aware of. Read Here for more (opens in a new tab)
Stamp Duty Land Tax basics for property investors
Stamp Duty Land Tax is charged as a percentage of the amount given for 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.
SDLT banded rates
|Up to £125,000||Zero|
|Over £125,000 to £250,000||1%|
|Over £250,000 to £500,000||3%|
|Over £500,000 to £1 million||4%|
|Over £1 million to £2 million||5%|
|Over £2 million from 22 March 2012||7%|
|Over £2 million (purchased by certain persons, including corporate bodies) from 21 March 2012||15%|
Return On Investment (ROI) is clearly reduced when you pay Stamp Duty Land Tax. It is very important that you look at all ways to reduce ther payment of Stamp Duty Land Tax to HMRC.
Does that need to be the case whereby you pay SDLT?
SDLT 3% surcharge from November 201
There are many property investors who are buying properties below the lower SDLT threshold of £125,000 so that they can avoid paying any SDLT on their purchases.
However, times are changing and while the scaled SDLT charges applies for anyone buying their first property, 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 set in my previous article and is based on the full amount of the property.
For example, if you already have one house, which you do not intend to sell as part of the transaction, you make will incur the additional 3% SDLT. This will inevitably increase the cost of buying a property and decrease the return on investment (ROI).
Who is affected by the 3% SDLT surcharge?
The government announced the new charges from November 2015 (from their Autumn Statement). Let us look at the scenarios that will result in the 3% SDLT surcharge when buying:
- a second home as a holiday home
- property investments when you already own a house in your own name or in a limited company
- buying a home for the first time if you a property investment
If you sell your own home and buy another home, you will not have to pay the additional 3% on that property. However, if you will pay the 3% SDLT surcharge if you do not sell your home as part of the transaction. You can have the 3% SDLT surcharge refunded back to you from HMRC if you sell your first home within three years of buying the new home.
You should have noted that the last bullet point shows that the 3% surcharge when you buy a new home even if you are currently in rented accommodation. This seems wrong to me but we have to work within the law. However, the three-year clock does not start to tick until November 2018. So, you would not need to pay the 3% SDLT surcharge if you previously owned a home (which you lived in).
The higher rates will affect properties that exchange after 25th November 2015 (when the change was announced), where completion takes place on or after 1 April 2016.
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 Land Tax rates for commercial properties
You may be looking to buy additional properties as an investment. As discussed in my earlier article, you will need to pay SDLT and this will vary depending on the value of the residential property.
However, if you are buying commercial properties then you will pay SDLT at different rates, as follows:
|Up to £150,000||Zero|
|Over £150,000 to £250,000||1%|
|Over £250,000 to £500,000||3%|
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?
Averaging Stamp Duty Land Tax cost
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 SDLT.
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 headlease 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.
Stamp Duty Land Tax charges when buying mixed use or commercial properties
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.
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.
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