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
Tax issues need to be diagnosed in order to be understood for a remedy to be implemented.
Stamp Duty Land Tax is charged as a percentage of the amount given for property.
The chargeable consideration is simply the purchase price (excluding the value of any extras such as carpets or furniture which are not counted as fixtures and fittings) so you apply the relevant SDLT threshold and rate to the purchase price.
SDLT may be payable when property or land is bought or transferred, whether or not the transaction involves payment of money and/or non-monetary consideration (which can include goods, services or the assumption of financial liabilities). The total amount on which SDLT is payable is known as the ‘chargeable consideration’.
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%|
The payment of SDLT can damage the Return On Investment (ROI) calculation and you may therefore take the decision not to buy the property.
Does that need to be the case whereby you pay SDLT?
SDLT 3% surcharge from November 2015
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). Lets look at the scenarios that will result in the 3% SDLT surcharge:
- Buying a second home as a holiday home
- Buying a new property investment
- 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.
Stamp Duty Land Tax rates for commercial properties
As an investor 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:
– 0% on property valued between £0 – £150,000
– 1% on property valued between £150,000 – £250,000
– 3% on property valued between £250,000 – £500,000
– 4% on property valued over £500,000
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 – i.e. the 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 – i.e. the five untenanted flats.
Implementing the averaging of Stamp Duty Land Tax
Now we have identified the treatment here are a few ways that you can apply it to your tax pains.
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 formed under the Civil Partnership Act 2004, are 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.
A transaction following a person’s death that varies a disposition (whether effected by will, under the law relating to intestacy, or otherwise) of property of which the deceased was competent to dispose, 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 attracts 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.
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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