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A little known amendment to Stamp Duty Policy in the Autumn Budget 2017 could help 1,000’s of small landlords in regards to their tax planning.
The changes were billed as “Minor Amendments” and were overlooked by many landlords and their accountants who believed the changes wouldn’t affect them.
HOWEVER, the new rules confirm that the additional 3% of Stamp Duty does not apply to transfers between spouses. For landlords who wish to share beneficial ownership with spouses for tax planning purposes this is extremely welcome news, particularly for landlords whose properties are mortgaged.
Here’s an example:-
Mrs X is a higher rate tax-payer. She has one rental property in her own name; an HMO worth £300,000 which produces £10,000 of net profit after deducting £10,000 of mortgage interest and £10,000 of other expenses.
However, as a result of the restrictions on finance cost relief, in the 2017/18 tax year she will pay tax 40% tax on £12,500 and get a tax credit of 20% of the extra £2,500 of disallowed interest. The result is £4,500 of income tax.
It gets worse, in fact MUCH worse.
In the 2018/19 tax year she will pay tax 40% tax on £15,000 and get a tax credit on 20% of the extra £5,000 of disallowed interest. The result is £5,000 of income tax.
In the 2019/20 tax year she will pay tax 40% tax on £17,500 and get a tax credit on 20% on the extra £7,500 of disallowed interest. The result is £5,500 of income tax.
And in the 2020/21 tax year and thereafter she will pay tax 40% tax on £20,000 of profit and get a tax credit of 20% of the extra £10,000 of disallowed interest. The result is £6,000 of income tax.
The good news is that, because her wife has no income at all, there is a tax planning opportunity to transfer the beneficial interest in her property to her wife without having to refinance. On that basis, the whole of the £10,000 of profit will be tax free and her wife will be completely unaffected by the restrictions on finance cost relief. There is no CGT on transfers between spouses, but there is Stamp Duty if there is a mortgage because mortgages are are deemed to be a consideration on the basis that a liability cannot be gifted according to HMRC rules – see example 2 on the HMRC website via THIS LINK.
Prior to the change of policy, the maximum consideration which could be transferred to a spouse without incurring the additional rate of Stamp Duty was £40,000. However, following the change there is no additional rate of Stamp Duty payable on transfers between spouses at all. The normal rate of Stamp Duty ONLY becomes payable if the mortgage consideration exceeds £125,000.
What this means is that transfers of beneficial interest between spouses are now significantly more affordable. Best of all, the legal work only costs £250 + VAT per property.
In the example above, fees of £700 would result in tax savings of £16,500 over the next three years alone!
Every situation is different, so we do recommend a consultation first, for which we charge a fixed fee of £400. Consultations come with a guarantee of total satisfaction or a full refund, so if it transpires that we cannot save you money you can request a full refund. This means you will have spent nothing, but your time investigating your options. All recommendations we make are checked by Mark Smith, Head of Chambers at Cotswold Barristers. If he agrees with our recommendations he will adopt them as his own professional advice if you instruct him to complete the legal work for you.
The new Policy can be downloaded from the HMRC website via THIS LINK.Show Form To Book A Tax Planning Consultation
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