18:18 PM, 23rd March 2011, About 11 years ago 1
New stamp duty rules for portfolio property investors announced in the Budget opens the door on income-shifting tax planning for many high net worth landlords.
One strategy for saving income tax for married couple is switching shares of ownership.
The strategy works when one spouse pays tax at 40% or more while the other has a large unused lower rate (20% or less) tax banding.
So, for a couple with £30,000 of rental income split 50:50, the high rate taxpayer pays £6,000 tax on a £15,000 share of the rents at 40% while the other partner pays £3,000 tax on their £15,000 of rents.
If the couple can switch most of the rents to the lower rate taxpayer, they can save up to £3,000 in tax a year.
Stamp duty has been a barrier to this strategy as switching shares in buy to let properties has attracted stamp duty on the total value of the transfer. The rule is applied to properties with mortgages.
Income shifting will cut income tax and CGT
From April 6, stamp duty is now calculated at an average value of the transferred properties rather than the aggregate value – with a minimum 1% stamp duty charge.
So, switching a total value of £475,000 for five properties is charged at 3% or £14,250 today – but from April 6, is expected to fall to around £4,750 on the new calculation.
The aim of the change is to attract institutional investors in to purchasing buy to let properties, but the knock-on effect lets thousands of married landlords switch their assets to save income tax.
The move also affects capital gains tax, because couples can switch their shares in equity before a sale to save CGT at the highest rate as well.
The change will cost the government an estimated £70 million in 2011/12 and £150 million by 2015/16.