Home front: how to avoid the additional stamp duty
The surcharge on additional homes drives some couples to divorce in an attempt to beat it. Sam Barker has five more tips
People who bought an additional property paid nearly half of all stamp duty last year, recent figures show, but for savvy buyers there are ways to reduce this bill. Second home buyers paid £4bn of the total £9.2bn stamp duty received in the 2017-18 financial year, according to figures from HMRC. The bill is so high because buyers of additional homes have had to pay a 3 percentage point surcharge since April 2016.
But there are ways to bring this cost down – although, as with any type of tax avoidance, there is always a risk that HMRC will try to close these loopholes in the future.
1 Buy woodland
One way to circumvent the tax surcharge is to buy a house with a plot of woodland.
If forestry land is part of the property transaction, a buyer can argue that the purchase is “mixed use” rather than residential, meaning the surcharge will not apply.
The woods do not need to be attached to the house. The buyer is required to give some evidence that the land is non-residential and is being used commercially.
2 Semi-commercial property
Many of those who pay the surcharge will be landlords. One way for these buyers to sidestep the extra tax is to buy a semicommercial property such as a shop with a flat above it.
As the stamp duty surcharge applies only to residential dwellings, landlords in this position will pay commercial stamp duty, which is cheaper.
Commercial stamp duty is 0pc on properties worth up to £150,000, 2pc on the value between this and £250,000 and 5pc above that level. Residential stamp duty starts on homes worth £125,000. A rate of 2pc is payable up to £250,000, then 5pc between this and £925,000, 10pc on the band up to £1.5m and 12pc on any value above £1.5m – with the surcharge on top for additional properties.
Steve Olejnik of Mortgages For Business, a broker, said: “We have some landlords looking at semicommercial property. They’ll have the residential element – you’ll get a [commercial] tenant in downstairs on a three to five-year lease and have an investment property still generating residential income [upstairs].”
3 Build it yourself
You can beat the surcharge by buying a plot of land and building your own home. Any houses built in this way will incur stamp duty on the purchase price of the land rather than the finished cost of the house, and the tax will be charged at the lower commercial rates.
However, Nimesh Shah of Blick Rothenberg, the accountancy firm,
The couple paid £3,000 for a divorce but avoided £30,000 in stamp duty
warned buyers to “be careful” with this approach. A plot of land that a previous owner had developed could be taxed at the higher residential rate.
While building your own home can appear daunting, around 7pc to 10pc of all new homes are built in this way, according to a Commons Library briefing paper. It is also possible to finance the project with a self-build mortgage, avoiding the need to have large cash sums in advance.
4 Buy in bulk
Another way to water down the surcharge is to buy several homes from the same seller. This can qualify for “multiple dwellings relief ”. It means the stamp duty paid is based on the average value of all the properties bought, which could save you money.
Those who buy six or more properties in one transaction can cut their bill further, as the tax authorities deem this to be a commercial rather than a residential purchase – which means lower rates and no tax surcharge.
But buying in bulk is unlikely to be an option for most buyers. Mr Olejnik said: “We hardly see it at all, to be honest. It’s rare for people to buy in bulk and the opportunities are few and far between.”
The advantage of this method is that it is laid out by HMRC and so is unlikely to change.
5 Get divorced
Some people are so desperate to avoid the tax that they will even consider splitting up from their partner. Currently, a married couple count as one party when it comes to paying stamp duty on an extra property.
Even if the main home is wholly owned in one partner’s name and the additional property is bought by the other partner, extra stamp duty is still payable.
Mr Shah said he had seen a recent case where a London couple got divorced to avoid the surcharge.
He said: “Obviously this was an amicable divorce. They would have had to pay the surcharge on the property they were buying, so decided to get divorced and buy the property in the name of the person who didn’t own the existing property, then look to remarry in the future.”
The couple paid £3,000 in legal fees to get divorced but avoided £30,000 in stamp duty in the process.
Mr Shah said he knew of couples who were delaying their marriage for the same reason.
6 Get someone else to pay
If you’re prepared to drive a hard bargain – made easier in a buyers’ market – it can be possible to persuade the seller to pay to ensure the deal goes through.
If a seller has had the property on the market for a while, or needs the money quickly, they may be prepared to pay the stamp duty themselves. This has become a common ploy among developers of new buildings during the recent market slowdown.
The option that was...
Another way to avoid the surcharge was shut down by HMRC. The loophole allowed a couple who jointly owned a property to escape the surcharge on the purchase of a second property by giving a share in their home to someone else.
If the couple owned 50pc of the property each, one of them could give just 1pc of their half to their partner, or to a child. They could then claim they had no “major interest” in the property and therefore would not face the surcharge if they bought the second home. This loophole was closed in the November Budget of 2016.
Buying a woodland home could be used to circumvent the stamp duty surcharge