Snakes on the property ladder

Written by Gavin Stebbing on 11 May 2016

The new 3% Stamp Duty Land Tax (“SDLT”) surcharge has been chargeable for just over a month now, and already we are seeing situations where the new rate is biting in unexpected circumstances. In simple terms, all purchases of residential property will be subject to the 3% surcharge where a purchaser buys property in the UK and at the end of the day of purchase he has an interest in any other residential property in the world worth more than £40,000. There are various reliefs from the 3% surcharge, the main one being where a person’s main residence is being replaced. A purchase of residential property by a company will always be subject to the 3% surcharge, even if it is the company’s first purchase.

Let’s have a look at a few traps:

Example 1:

A few years ago Fred purchased a buy-to-let property in Dulwich for £400,000 and decided to put it in the joint names of his wife and 2 adult children, owning 25% each. At the time this was great tax planning; the children had an income which paid for their university years in a tax-efficient way, and at the same time Fred’s estate was reduced by £200,000. Fred’s oldest son Peter now wants to move out of the family home and purchase a flat in Wandsworth for £450,000 as his main residence. Unfortunately that purchase will be subject to the 3% SDLT surcharge, costing him an extra £13,500, because at the end of the day of purchase, he has an interest in more than one residential property.

Example 1 (continued):

Peter comes up with a bright idea; the Dulwich buy-to-let is worth £800,000 so let’s form a company and transfer Peter’s share, worth £200,000, to BuytoLet Limited. This will save £13,500 in SDLT for Peter as he will no longer own two residential properties at the date of purchase of his main residence. However, the sale of his share to BuytoLet Limited for £200,000 will also be caught by the 3% SDLT surcharge, resulting in an SDLT surcharge of £6,000 on top of the usual £1,500. In addition, the transfer by Peter will be a disposal for capital gains tax purposes, producing a chargeable gain of £100,000 taxable at 28%. Not such a bright idea after all.

Example 2:

Paul’s main residence has been in Haslemere for many years, but also owns a flat in Knightsbridge in London which he occupies occasionally, and has elected this as his main residence for capital gains tax purposes. Paul decides to sell the Knightsbridge flat and purchase a new flat in Mayfair, and assumes that he will not have to pay the 3% SDLT surcharge because he is replacing his main residence. Wrong! The main residence for SDLT purposes is a question of fact, and since Paul spends more of his time in Haslemere, then that counts as his main residence for SDLT purposes, regardless of the election for capital gains tax purposes. Paul must pay the 3% SDLT surcharge.

Example 3:

Debbie has been working overseas for a few years in Italy where she fell in love with a local rugby player called Joe; he has 3 brothers and they jointly own a ski lodge in Cortina. Debbie and Joe recently got married and have decided to move back to London and buy a flat in Nine Elms. Debbie has no other property, but Debbie and Joe will have to pay the 3% surcharge because at the end of the day of purchase, Joe owns a share in another residential property. It does not matter that the other property is in Italy, and it would make no difference if the purchase were in Debbie’s sole name rather than joint names because husbands and wives (and civil partners) are regarded as a single unit for these purposes. However, if Debbie had purchased the Nine Elm’s flat in her sole name before they were married, then the 3% surcharge would have been avoided.

Please get in touch with your tax advisor if you have any questions about the changes to SDLT and how it will affect your future purchases.