2nd property tax when buying out share of jointly owned inherited property?

by Readers Question

11:00 AM, 23rd May 2016
About 3 years ago

2nd property tax when buying out share of jointly owned inherited property?

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2nd property tax when buying out share of jointly owned inherited property?

When our parents died a few years ago my siblings and I inherited their house. My sister, living away, wants to return to live there eventually, but was unable to buy the others out at the time. We therefore agreed to transfer the property into our joint names and let it pending her being able to buy us out one at a time, as and when her circumstances permitted.joint share

I have belatedly come to wonder how the 2nd Homes tax will affect that transaction. At current validation our individual shares are worth around £35-£38k, ie, under the £40k threshold. Does that mean buying out one of the other shares means no tax is payable? Or will the tax be assessed on the value of the property and then apportioned to the share being transacted? Or could the tax be avoided by one of us gifting their share to the sister (who would then pay the going rate to the donor as separate and unrelated money transfer). We all own our own homes so the parental home is definitely a second property for us.

The 2nd property tax was never aimed at people in our situation but I have a horrible feeling we will suffer as an unintended consequence!

Has anyone any thoughts?

The property is in Scotland so its version of the tax will apply.

Thanks

David



Comments

Neil Patterson

11:04 AM, 23rd May 2016
About 3 years ago

Hi David,

If your sister already owns a percentage share of the property to pay the 3% Stamp surcharge would seem very harsh, but from past questions there does seem a lot of confusion around this new tax.

I think we are going to need a tax expert on this one.

Or I know it takes forever but have you tried calling HMRC ?

Laura Delow

15:15 PM, 23rd May 2016
About 3 years ago

If your sister wanting to keep the property is a homeowner, until she wants/can afford to move in to the inherited property, she could buy you & your other sibling out by capital raising the required 2/3rd's ie 67% loan to value (LTV) on a buy to let (BTL) basis with a lender who will do a transfer of equity capital raising remortgage to buy out other beneficiaries. Then she could let it out for say a couple of years (best not move in to it earlier as there would likely be an early redemption penalty on redeeming the buy to let mortgage during the first 2 years in favour of a residential mortgage). As long as the open market rent (OMR) is sufficient to cover the mortgage using the lenders rental calculation of 125% of a 5.5% notional interest rate (not the pay rate) for mortgages in excess of 65% LTV (otherwise 125% of 5% notional rate if 65% LTV or below). Therefore if she needs to raise £38K x 2 to buy you both out = £76K capital raised on a value of £114,000 then an OMR of £435 pm would be needed (assuming £114K value but if she's allowed to buy you both out at £37,050 each vs £38K then it is 65% LTV and the OMR needed is now only £386 pm. If your sister does not have an earned income or is below many BTL lender's minimum income requirements & she is a First Time Landlord (FTL) then the best lender that comes to mind is Birmingham Midshires who do not insist on a borrower having a minimum earned income & will allow BTL capital raising to a FTL to buy out other beneficiaries with a simultaneous transfer of equity without making her wait until 6-12 months following grant of probate before applying. On £37-38K you or your other sibling being bought out won't pay stamp duty or CGT as I presume no gain has been made since you inherited each of your share, but your sister will pay stamp duty at 3% on I believe the 2/3rd's being bought out (please have her check this with her solc) ie if buying out £76K this is considered what's called a chargeable consideration @ 3% = £2280. Then on top of course is the lender's valuation fee (very small) & the legal fees but BMids sometimes offer Fees Free legals on remortgages if through a BMConveyancer & your sister would just pay any costs to do with the Transfer of Equity.

Mike W

18:11 PM, 23rd May 2016
About 3 years ago

My understanding is that under LBTT if the value of the transaction, in this case the share being bought, is under £40k then no LBTT is payable. So if you have 50% and that 50% is worth less than £40k you are in luck.
However I am not a solicitor and since the solicitors have to report these matters you would be better checking with your solicitor.

Gifting would also work but beware issues around mortgages and deemed transfers.

Puzzler

18:55 PM, 23rd May 2016
About 3 years ago

If it's her only property she wouldn't have to pay the enhanced SDLT, would she?

Laura Delow

7:12 AM, 24th May 2016
About 3 years ago

Reply to the comment left by "Puzzler " at "23/05/2016 - 18:55":

If she is not an existing homeowner, you are correct - no SDLT on buying out the other 2 as this won't be a second residence and falls below the standard SDLT threshold, but most if not all lenders would not lend BTL borrowing to a FTL if she is not an existing homeowner.
With regards Mike W's comment of no SDLT being payable if below £40K, this is also correct but if she is buying out 2 siblings at £35-38K each = total of £70-76K more owned than she did before the transaction, I understand this is considered the chargeable consideration. If HMRC assess each £35-38K as isolated chargeable considerations then there would be no SDLT but I do not think they treat each one in isolation, unless of course this may well be the case if she buys out one sibling now for £35-38K and the other in say 13 months time ie isolated transactions, but this is just me trying to apply common sense & may not be correct.

Simon Misiewicz

22:00 PM, 24th May 2016
About 3 years ago

This will be considered linked transactions so they will need to be added (paying of the two other people involved). As such the SDLT will be the consideration however there is no SDLT below the £125K anyway so there is nothing to pay.

In regards to the 3% surcharge again I agree with the above whereby if it is her only home then there will be no surcharge at all.

I hope my 0.000001% helps

Warm regards

Simon

Ste Curious

14:00 PM, 27th October 2016
About 2 years ago

Great feedback Laura. I have a similar situation currently in progress, maybe you could comment? - Sibling and I inherited house & a little cash, we have completed Probate (no need for solicitors), I will buy out siblings share of house using BTL mortgage and then rent it. This will be a second house attracting Stamp Duty to buy my siblings share. I will buy the share with my wife on a joint mortgage so the rent income tax is split. Question 1: House is still in fathers name, can the Transfer of Equity to my & wife's name with Land Registry be carried out in one step by building society's conveyancing solicitor but only paying stamp duty on the share we are buying out from sibling, OR should I register house inheritance with Land Registry in sibling and my name before the Transfer of Equity to buy out the siblings share? Thus two actions with Land Registry and two admin fees. Question 2: Has the inheritance cash and house got to be split equally, or can my sibling takes a larger share of the cash in the inherited estate, thus is entitled to a lower % of the house, would it attract less Stamp Duty with the Transfer of Equity? Question 3: If the joint mortgage with my wife is just below £125k, then at a later date I remove my name from it, and transfer the house 100% into my wife's name at the Land Registry, would there be any Stamp Duty as no consideration is paid out even though it is a second house, and could my wife then take all the income and I remove it from my tax return? I realise Capital Gains Tax when we sell is better split over two, so maybe this is not worthwhile (unless there is a time limit from which we could transfer back to joint before we sell). Sorry if this is rather detailed.

Ste Curious

11:15 AM, 28th October 2016
About 2 years ago

Reply to the comment left by "Laura Delow" at "24/05/2016 - 07:12":

Great advice in your two comments Laura, I have also posted some related questions below but am not sure if you will be notified. Thanks


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