Stamp duty - what are the ways to save on this controversial tax?
With the Conservative Party winning a big majority in last week's general election, it will be expected to honour its manifesto pledge of plans for a 3% stamp duty land tax surcharge for non-UK tax residents – both companies and individuals.
The extra 3% surcharge would be on top of the 3% surcharge that all buy-to-let and second home buyers already pay.
Now the Tories have won, this could mean a surcharge of hundreds of thousands of pounds for some non-UK tax residents, including expats planning to move back home to the UK.
While it might have been a good vote-winning tactic, it is a dangerous ones. The evidence is clear that a high rate of SDLT stagnates the property market. Since 2014, when the current rates were introduced, the market in Prime Central London has dropped about 20%.
It’s often forgotten how much of this drop occurred before the fateful 2016 referendum. The number of transactions has also significantly declined, as SDLT has at best deterred buyers, and at worst defeated them.
This is leading to an unnaturally stagnant market and is a particular hardship for those growing families who need more space but are unable to meet the SDLT burdens inherent in buying a new larger property. Coming up with many tens of thousands of pounds for SDLT - on top of the required 20% deposit – can be crushing, even for those already on the property ladder.
Earlier in the year there was talk of reducing SDLT. This would be welcome. In the meantime, we recommend our clients buy with the intention to hold for a minimum of 5-10 years in order to justify their SDLT outlay.
Beyond that, we recommend buyers look at the best strategies available to minimise SDLT on a given transaction. With SDLT rates as high as they are - and potentially getting higher - it is well worth seeking out the best strategies available.
Unmodernised properties incur lower SDLT. This is because SDLT is only charged on the purchase price, not the ultimate value, and unmodernised properties generally sell at 30% below the value of a comparable renovated property.
This means the buyer of an unmodernised property has the opportunity to pay significantly less in SDLT than the buyer of a fully renovated property.
Buy multiple dwellings
Multiple Dwellings Relief is helpful for investors, but the average buyer may be surprised to learn she can also benefit. It's easy for this sort of buyer to miss out on MDR unless she is well advised. Let’s say she has found a charming house in Prime Central London that includes a granny flat. If she applies for MDR, she could save as much as 50% in SDLT.
This could mean a savings of many tens of thousands of pounds. Please do keep in mind that this percentage depends on a number of assumptions.
Buy properties in a corporate structure
The main benefits of using a corporate are primarily the deductibility of mortgage interest and the low rate of corporation tax. If the property in question is of significant value, it may also be worth considering holding the property in a corporate structure so a subsequent purchaser has the opportunity to buy the shares of the company that holds the property, rather than buying the property directly, thus either reducing Stamp Duty Tax to 0.5% for UK companies or waiving SDT for offshore companies (in most cases).
That said, buying in a corporate is generally only worthwhile if the property is to be let out or developed. If the buyer intends to occupy the property, a corporate would generally not be a good idea because there would be additional ATED, benefit in kind issues as well as a 15% flat rate of Stamp Duty Tax on acquisition, which can erode the saving on an eventual sale of the shares. They also would not qualify for private residence relief.
As tax is a highly specialist area, we always begin by introducing our clients a tax specialist such as Richard Perry of Calibrate Law so their individual circumstances can be taken into account to minimise SDLT and other tax implications, while maximising profit – and peace of mind. Richard has been kind enough to consult on this article.