Here’s some cornerstone information you need to know if you’re wanting to save on stamp duty when purchasing property.
We will cover:
- Strategies to save on Stamp Duty when purchasing property
- How to avoid the 3% surcharge in Stamp Duty
Strategies to Save Stamp Duty – Introduction
Stamp Duty, or Stamp Duty Land Tax (SDLT) is the tax levied on property purchases.
What used to be a small annoyance or extra cost has now become a significant financial burden, along with the fees charged by solicitors and agents.
As a result, it’s more important than ever to explore effective strategies for reducing your SDLT liability.
In this article, we’ll explore effective methods to reduce your SDLT and maximise your savings during property purchases.
1. Excluding Chattels from SDLT Calculation
It’s essential to be aware that SDLT is only applicable to the property itself when making a purchase.
Exclude any extra items, such as furniture left by the seller in a residential property or equipment in a commercial property, from the SDLT calculation.
It is advisable to have a separate valuation for these extra items specified in the contract.
Although carpets and curtains usually don’t drastically affect the property’s overall price, it’s important to be aware that exceptions can occur.
When buying properties such as pubs, nursing homes, or restaurants as an operating business, there’s an ongoing debate about whether a significant amount should be included for goodwill in the SDLT calculations.
HMRC believes that in such cases, goodwill is usually inseparable from the property, and as a result, no SDLT should be exempted when making the entire payment.
However, it’s worth noting that many experts on the taxpayer side strongly disagree with this perspective.
2. Avoiding the 3% Surcharge
If you’re buying a property that is not your sole residential property and is not meant to replace your previous main residence, you will usually face a 3% surcharge on the SDLT.
This additional charge can significantly impact your expenses.
To avoid this surcharge, you can involve a family member who doesn’t own any other residential property as the buyer.
One effective strategy is to establish a trust where the family member becomes the beneficiary.
This approach offers various ways to achieve the desired outcome.
For example, if parents who already own at least one residential property purchase a property for their son, they would be subject to the 3% surcharge.
However, if they buy the property as trustees for their son, and the son has the necessary benefits and interests in the trust, they would be eligible for an exemption from the 3% surcharge.
This exemption would apply as if the son were directly purchasing the property without owning any other residential property.
3. Acquire the Company
In certain cases, the property you intend to purchase may be owned by a limited company.
Although this approach is more beneficial for commercial properties than residential ones, you can consider an alternative method: purchasing the shares of the company that owns the property, instead of buying the property directly from the company.
This strategy is particularly beneficial when the company’s sole purpose is to hold the property in question.
By choosing this method, you essentially gain the same ownership rights as purchasing the property directly, but without having to pay any SDLT charges.
It’s important to note that SDLT does not apply to the purchase of companies, even if their primary function is property ownership.
Instead, you would be subject to the significantly lower stamp duty on shares, which carries a rate of 0.5%.
This approach offers significant cost savings and is particularly advantageous in simplifying the property acquisition process.
4. Mixed Residential and Commercial Purchases
Those experienced in residential and commercial property investments are well aware of the noticeable difference in SDLT rates between the two sectors.
Interestingly, our legislative framework provides a rare favour by allowing a beneficial provision.
When a property includes both residential and commercial elements, the regulations permit the application of the more favourable commercial SDLT rates to the entire property, rather than solely to the commercial portion.
In certain cases, sellers may intentionally include a commercial element, like adjoining farmland, within a property to reclassify it from the pure residential category to the mixed category.
This strategic classification can have significantly advantageous effects on the SDLT.
Additionally, it’s worth mentioning that when you buy a block of flats or acquire at least six residential properties in a single transaction, you can take advantage of applying the commercial rates of SDLT.
This provision can further contribute to substantial savings.
5. Multiple Dwellings Relief
SDLT offers a beneficial provision known as Multiple Dwellings Relief.
This provision allows you to potentially avoid higher SDLT brackets when buying multiple dwellings in a single transaction.
This relief may not be immediately apparent, so it’s crucial to consider its implications.
To illustrate its application, let’s explore a scenario derived from real-life cases.
Meet John, who is in the process of buying a spacious Victorian terraced house.
Over time, the property was somewhat haphazardly divided into the basement and the three top floors.
The family selling the house currently occupies the top three floors, while their elderly parent resides in the basement.
Despite the presence of a functional door connecting the two sections, the different generations of the family use different parts of the property.
After seeking advice, John learns that, for SDLT purposes, the basement and the top three floors can be considered as two distinct dwellings.
Consequently, the tax paid by the solicitor during the purchase turns out to be excessive.
In response, John’s accountant submits a refund claim to rectify the overpayment.
Multiple Dwellings Relief is a valuable opportunity to save money, underscoring the importance of carefully evaluating the quantity and type of dwellings in a property acquisition.
Seeking our professional guidance ensures you make the most of this relief and avoid overpaying SDLT.
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