New SDLT Rules Can Help Smaller Landlords

by Mark Alexander

16:59 PM, 29th March 2018
About 9 months ago

New SDLT Rules Can Help Smaller Landlords

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New SDLT Rules Can Help Smaller Landlords

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.

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Comments

Seething Landlord

13:45 PM, 27th March 2018
About 9 months ago

Mark, have you been able to establish whether transfers of mortgage liability on different properties between spouses are regarded as linked transactions and therefore assessed for SDLT on the cumulative amount rather than separately?

Mark Alexander

14:41 PM, 27th March 2018
About 9 months ago

Reply to the comment left by Seething Landlord at 27/03/2018 - 13:45
We do not have a definitive answer yet, so the cautious approach is to assume that transactions will be considered to be linked.

Kais Malique

16:50 PM, 27th March 2018
About 9 months ago

Hi Mark. I just wanted to confirm I can now add my wife onto my existing Buy-To-Let via declaration of trust without having to pay any Stamp Duty as long as the mortgage consideration doesnt exceeds £125,000?

Mark Alexander

17:01 PM, 27th March 2018
About 9 months ago

Reply to the comment left by John at 27/03/2018 - 16:50
Hi Kais

Thank you for your question.

The answer is that it depends on several factors.

I cannot offer recommendations in isolation of the full facts and I do not recognise your name as being one of my existing clients. I appreciate you might be using a pseudonym though. If that is the case, and you are one of my existing tax consultation clients, please email me. I will then check my existing case notes and may also need to call you prior to making any recommendations.

If you are not one of our existing tax consultancy clients, please book a tax consultation via the link below.

https://www.property118.com/book-a-consultation/

ANGELA WILLIAMSON

1:11 AM, 28th March 2018
About 9 months ago

Hi Mark
Does this apply to properties in Wales. As of April 1st. There is no stamp duty in wales but Land Transaction Tax.

Mark Alexander

6:58 AM, 28th March 2018
About 9 months ago

Reply to the comment left by ANGELA WILLIAMSON at 28/03/2018 - 01:11
Hi Angela

I will need to check to be absolutely certain but the removal of the additional 3% rate on transfers between spouses definitely applies to LBTT in Scotland so I am reasonably confident that it will apply to LTT in Wales.

The general principles of transferring beneficial interest definitely apply in England and Wales because our legal system is identical in that regard.

Landlord77

8:40 AM, 28th March 2018
About 9 months ago

Hi Mark.

When transferring part of the Buy to Let property to my wife (basic tax payer) and where the mortgage consideration transfer is above £125k

(I) does the portion under £125k still incur SDLT at 0%?
(Ii) for the portion above £125k, is the SDLT amount at 3% or 5%. ?

Mark Alexander

8:43 AM, 28th March 2018
About 9 months ago

Reply to the comment left by Landlord77 at 28/03/2018 - 08:40

The position would be as follows:-

Mortgage value transferred up to £125,000 0%

The next £125,000 (the portion from £125,001 to £250,000) 2%

The next £675,000 (the portion from £250,001 to £925,000) 5%

The next £575,000 (the portion from £925,001 to £1.5 million) 10%

The remaining amount (the portion above £1.5 million) 12%

Landlord77

9:35 AM, 28th March 2018
About 9 months ago

Reply to the comment left by Mark Alexander at 28/03/2018 - 08:43
Thanks mark. That is good news. My wife and i also own our residential home (via mortgage) so just wanted to double check if the additonal stamp duty percentages would apply.

Mark Alexander

9:40 AM, 28th March 2018
About 9 months ago

Reply to the comment left by Landlord77 at 28/03/2018 - 09:35
The additional rate of Stamp duty is no longer payable on transfers between spouses.

If you were to transfers property to anybody other than your spouse the additional rate of Stamp Duty would still fall due to the recipient. Similarly, if you acquire further property you will still need to pay the additional 3% Stamp Duty.

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