Stamp Duty Land Tax or SDLT, still commonly colloquially referred to as Stamp Duty, is a good example of the sneaky, creeping way that taxes crawl up on us from behind. Historically, all it probably was was a nominal amount that you paid for the privilege of getting a purchase of land and buildings officially recognised. And until very recent times, although it may seem hard for young people to believe it now, Stamp Duty on buying property was at a flat rate of no more than 1%. How different things are today!
A recent Chancellor who was short of money (and when aren’t they?) decided that Stamp Duty, rather than just being a comparatively small administrative charge, could be a really good way of raising funds. The property owner, is, after all, the archetypal captive market. You can’t get the property transferred into your name unless you pay the tax.
Then the constant itch to take part in amateur social engineering took hold of the politicians, and the rates of SDLT for residential property went through the roof, with a top rate of 15% now; as against the top rate for commercial property of 5%. Most of the damage was done under the lordship of our friend George Osborne, who seemed to have a pathological hatred of landlords and owners of second homes. One of the most punishing changes he brought through was the 3% surcharge which applies to all residential property purchases other than a sole property, or the replacement of your home.
The Fightback
Although we can’t pretend that it’s easy to save SDLT on buying your home, it is possible in the right circumstances, and anyone who is reeling from the compulsory donation of an arm and a leg that the current SDLT rules impose, just because they want to move house, would do well to have a look at some of the ideas that follow. You never know, there could be substantial savings out there if you know how to get them.
First out of the box is what you could refer to as the “carpets and curtains” exception; although this way of avoiding paying SDLT is by no means restricted to those items. The basic idea, of course, is that you only pay the SDLT on the property itself: the bricks and mortar and the land on which it stands, and not on any other assets that might be thrown in with the sale. Let’s look at a real life example.
Mr and Mrs C decided, on his retirement, to move from their large and agreeable bungalow on the edge of a rural village and move to a flat. They could foresee that managing the garden (which was 1.5 acres) was going to be too much for them as they got older. This had been a long term project, and they’d actually owned the flat, in another country, for some years when the time came to sell the UK house. So they were faced with the problem of what to do with a fully furnished house, complete with a small swimming pool, a ride on mower for the front lawn, a Robomower for the back lawn and a huge amount of other stuff.
Fortunately the purchasers, Mr and Mrs P, had no issue with the vendors leaving most of this kit. It was better quality than most of the equivalent that they had, and they were coming from somewhere where ride on mowers and Robomowers were distinctly surplus to requirements. A formal valuation of all the equipment came out at the fairly staggering figure of £40,000, and so this element of the agreed purchase price was allocated to furniture and equipment, thus saving over £3,000 Stamp Duty.
Sidestepping the 3% Surcharge
First of all, the good news. Most “normal” purchases of a person’s home don’t get clobbered for this extra 3% we’ve mentioned. It applies, as we’ve said, where you buy a property and you already own another residential property – unless the property you’re buying is a replacement for your main home. But you can come a cropper when buying a second home, or where you get things wrong, like in the following example.
David runs the Horse and Groom, a popular town centre pub, and lives in the accommodation over the top of the bar. With increasing prosperity, he decides that he’d like to move out of that accommodation into a house with a garden and a bit of peace and quiet. Unfortunately the rules don’t work for him. The new house only qualifies as a “replacement” for his main residence if that former residence is sold within three years of buying the new property.
Without wishing to go into too much technical detail, David has a possible escape from this “negative loophole” by way of “engineering” a disposal of the accommodation above the pub to a connected person. Providing he does this within a three year window, the extra 3% that he’s paid on buying the house should be refunded.
Then there’s the idea, which is getting understandably very popular, of exploiting your own children! If you’re buying a second home, or you’re buying your new residence in circumstances like those of David, that is without selling the old one, you could consider, at its simplest, putting the new home in the name of your child. If you’re one of the large majority of people for whom that’s not particularly attractive for practical and financial reasons, there is, fortunately, a way of having your cake and eating it, as in the following example.
Gordon and Gertrude have an only son, Robin, aged 18, whom they dote on. They’ve decided to buy a cottage in the Lake District as a bolthole for themselves when the pressure of metropolitan living gets too much. Because this is a second home, of course, the 3% SDLT surcharge will apply if they buy it in their own names. On the other hand, Robin is a very capricious and sensitive youth (for which read spoiled) and a certain basic common sense on the part of Gordon and Gertrude holds them back from the simple idea of giving the money to Robin to buy the cottage. So they take advice, and this is what they do instead.
A trust is formed, with Robin as the “life tenant” and his parents as trustees. In other words the property is bought in their name, and they have the discretion to do with it what they like, with the sole proviso that Robin has a right to live there during his life.
There’s a special rule, tucked away in the law relating to the 3% surcharge, which states that this situation is treated as equivalent to Robin himself buying the property. So, because Robin himself doesn’t own any other residential property, this purchase by the trust is relieved from the 3% surcharge.
And, of course, it’s not just your children you can exploit in this way, but any younger members of your family. This is where a certain amount of creative thinking, particularly relevant to property investors is likely to be called for. But do always bear in mind that if you’ve “given” a property to the young person in this way, this does mean that they will pay the 3% surcharge if they then go on to buy their own property in their own names – unless, of course, you’ve brought the ownership or “quasi ownership” arrangement involving that young person to an end by then.
Mix and Match
Now we come on to our favourite method of slashing SDLT on buying one’s home. We’ve already made the point that commercial property has much lower rates of SDLT than residential property. But what happens when a property that you buy is a mixture of the two? Do you apportion the purchase price between the two and pay the residential rates on the residential part, and the commercial rates on the commercial part?
Very fortunately, the answer to that is a resounding “no!” Perhaps the legislators foresaw too many time consuming arguments about valuation; but for whatever reason, they came up with the surprisingly benign rule that on a “mixed” purchase of this sort, you simply pay the lower, non-residential, rates of SDLT on the whole lot.
So how is this an SDLT planning opportunity? Well, we’ll just give a very simple example of a plausible real life situation, and leave it to the imagination of our readers to do the rest!
Robert Hooper has lived in Blackmore Farm all his life, and his father before him. It is with great reluctance that he decides that he can no longer afford the luxury of the beautiful old 17th Century farmhouse which has always up to now been the centre of the farming operations. Agriculture in his neck of the woods has done very badly for so many years, and Robert has such a penchant for buying expensive new plant, that the time comes when he really needs to realise the value locked up in the house. So he puts it on the market and goes off to live in what was formerly one of the labourers cottages on the farm. Steve and Susan Wheeler, a high flying television producer and his equally high flying investment banker wife, snap up the property for the very reasonable price of £1.5 million. But what they find difficult to swallow is the fairly eye watering share that the government has staked out for itself in the form of SDLT on residential property. So Susan takes the vendor to one side and suggests to him that he might like also so sell them 15 acres of the surrounding land, and then rent it back from them at a reasonable annual fee.
This changes the nature of the transaction from a residential purchase to a mixed purchase, and the SDLT that Steve and Sue end up paying is mere fraction of what they were looking at on the first basis.