The 3 per cent increase in the rates of stamp duty land tax (SDLT) since 1 April 2016, for those buying second homes and buy-to-let properties seems to have brought a new wave of tax avoidance schemes which purport to mitigate SDLT.
Similar schemes were popular a few years ago, but had largely disappeared as HMRC successfully challenged them and closed the loopholes. Most of those who participated in such schemes have had to pay the full SDLT lliability, interest on late payment, penalties in some cases, as well as the fees paid to the promoter of the scheme. A simple Google search reveals a handful of companies that, once again, offer structures which claim to save SDLT on property purchases for an upfront fee, although actual details of their schemes are sketchy. Almost certainly such schemes will be challenged by HMRC.
Complexity of new rules
Notwithstanding HMRC’s expected approach, it is perhaps not surprising that there has been a renewed interest in such schemes due to the sheer complexity of the new SDLT rules for second and subsequent properties and the potential for ‘unfair’ consequences. Many conveyancing lawyers do not understand the new rules sufficiently to be able to advise their clients, so we have seen cases of purchasers potentially paying too much SDLT as the conveyancer errs on the side of caution, or being told to take SDLT advice elsewhere. This may push the purchaser to seek ‘advice’ from one of the scheme promoter companies rather than from a more conventional tax adviser or lawyer who understands the new rules.
While the vast majority of transactions such as first time buyers purchasing their first residential property or homeowners moving from one main residence to another are unaffected, the higher SDLT rates apply to most purchases of additional residential properties (where, at the end of the day of the transaction, a purchaser owns two or more residential properties and is not replacing their main residence.
Traps for the unwary
In particular, confusion can arise where married couples each own or acquire property, since married couples are generally treated as one ‘unit’ for the purposes of the additional rate of SDLT. This means that, for example, if a husband owns a property and his wife then purchases a property in her own name, the wife will (subject to exemptions applying) be liable for the additional rate of SDLT.
Parents who already own a property and who wish to assist their child to purchase the child’s first property should consider gifting the cash to the child and maybe act as a guarantor on any mortgage, with the child buying the property in their own name. If the parents acquire an interest in the child’s property, the higher rate of SDLT will apply because the parents will own more than one residential property having not replaced their own main residence.
HMRC’s online guidance provides some useful examples as well as a simple diagram of how to check if a purchase of a property by the individual is liable for the higher rates of SDLT. While this will not cover every scenario, it does provide a useful starting point.
If it is not clear from HMRC’s guidance whether the higher SDLT rates apply to your particular situation, taking advice from a reputable adviser is recommended.
For more information please get in touch with Karen Clark, or your usual RSM contact.