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The everyday scenarios where you could be hit with the stamp duty surcharge

Written by: Paloma Kubiak
You may think the 3% stamp duty surcharge is reserved for buy to let landlords and second home buyers. But these ordinary family scenarios show where unsuspecting people may be caught out by a larger tax bill.

The stamp duty (SDLT) surcharge was introduced in April 2016, adding 3% to the usual stamp duty rates on buy to let properties and second or holiday homes.

While well intentioned, the stamp duty surcharge has actually brought some unsuspecting homeowners and homebuyers into scope of the additional 3% tax bill.

Nick Morrey, product technical manager at John Charcol, says: “Like many taxes there are plenty of scenarios that have been unexpectedly caught up in George Osborne’s additional stamp duty net.

“Property transactions have a variety of nuances and mechanisms that can potentially affect the nature of a qualifying purchase. Some of these could help reduce or even eliminate this liability. Therefore, it is important to take independent tax advice from an accountant or tax adviser in conjunction with a good mortgage broker to ensure you only pay what you need to pay. It’s important to check these things as not all options are appropriate to all consumers.”

Here are three scenarios to watch for and what, if anything, you can do to minimise the charge:

1) Adding partner to mortgage and title deeds

More and more Brits are cohabiting rather than rushing down the aisle. But when it comes to finances, Brits may show more commitment to their partner via shared bank accounts and joint house purchases.

Here, Michael and his former partner bought their property together but after splitting, Michael kept the £350,000 flat. He has a new partner, Lisa, and they have baby George and the family live in Michael’s flat. Lisa also owns her own property which she rents out.

Michael was keen to add Lisa to the mortgage and the title deeds of the flat so that it is considered their family home for estate planning reasons.

But by adding Lisa onto the mortgage and the deeds, this is technically buying a UK residential property while already owning an existing property.

Michael and Lisa were told that as the mortgage was £180,000, half the consideration (the part that is used to calculate stamp duty on transfers of equity), was £90,000, meaning they would need to pay £2,700 in stamp duty.

However, the couple decided on becoming ‘tenants in common’ rather than joint tenants so Lisa would own 20% and Michael would own 80%. This reduced Lisa’s chargeable consideration below the £40,000 stamp duty threshold, helping the couple avoid the tax altogether.

David Hannah, principal consultant and founder of stamp duty experts, Cornerstone, explains further: “No surcharge is due, provided the share of the partner was kept below £40,000 in value, as the property is mortgaged and Lisa is still assuming the value of the debt to be equal to her portion. Once the mortgage is repaid, the couple should re-evaluate ownership of the property to ease inheritance issues in the future.

“Even if the share were to be gifted to Lisa, as the property is mortgaged, her assumption of responsibility for a proportion of the mortgage debt is still classed as ‘consideration’ for the purposes of calculating SDLT. Therefore, the restriction of the share to below £40,000 would still be necessary to avoid incurring the surcharge.”

However, if Michael and Lisa were married in this scenario, then HM Revenue & Customs confirms no surcharge will apply. The law on the stamp duty surcharge was changed in the November 2017 Budget to disregard transactions involving ‘exchange of interests between spouses and civil partners’.

2) Brothers inherit property and one wants to buy the other out

Steven and Tom inherited an equal 50/50 share of their grandfather’s property. Here, the resulting tax charge depends on whether the brothers already own their own properties.

Hannah explains: “Should the brother buying out the other already own a residential property, his assumption of full ownership of a separate property (presumably valued above £40,000) would attract the surcharge.

“However, should the brother (buying the other one out) not own a separate property, this would not be the case. If the property is inherited jointly and a party inherits 50% or less of the value in the three years before they make a purchase of a separate residence for themselves, the surcharge will not apply.”

3) Sisters bought a home together but want to buy separately

Ellen and Claire bought their property over three years ago as first-time buyers. But during that time, Ellen’s got married and Claire is in a serious relationship.

Currently, Ellen and her husband live in the property while Claire has moved out to live with her partner.

They now want to sell the property and buy with their respective partners, both of whom are first-time buyers.

Hannah explains the situation: “If they sell the property before they buy their new respective properties with their partners, then the surcharge would not apply. If they sell the property after they purchase their new properties, the surcharge will apply on each of the onward purchases, and will be based on the purchase price of each property.

“They would each pay the regular SDLT due on the new purchase, plus an additional 3% surcharge on each banding of SDLT – 3% on the first £0 – £125,000 of the purchase price, 5% on the next £125,001 – £250,000, and so on.”

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