Why avoiding stamp duty may prove not worth the risk
divided between those who think that minimising the tax they pay is fair game, and those who think that such behaviour is “morally repugnant”, to quote the Chancellor of the Exchequer.
One tax that seems to cause a lot of annoyance is Stamp Duty Land Tax, paid when buying a house. Abbreviated to SDLT, this tax applies to the purchase price of the house, with the rate rising with the value of the property, as follows: Up to £125,000 you pay nothing; £125,001 to £250,000 is 1%; £250,001 to £500,000 is 3%; £500,001 to £1,000,000 is 4%; £1,000,001 to £2,000,000 is 5% and £2,000,001 and above is 7%.
The rate applies to the whole price. So if you buy a house for £249,990, you pay SDLT at 1%, coming to £2,499. However, if the price is £250,010, the SDLT is at 3%, costing you £7,500. So a £20 higher price results in £5,000 more tax. Not surprisingly, the average UK house price in the quarter to 30 September 2012 was £249,958
There is therefore a temptation for some to try to get the purchase price into a lower price bracket, or even to avoid the tax altogether if possible, and there are a few options that can be considered if you want to minmise the cost.
You may find a house on the market at slightly over one of these thresholds. One popular technique for trying to get into a lower price bracket is to attribute part of the price to items such as furnishings that are not built into the property. If successful, that means that SDLT can be reduced, because it isn’t payable on movable items.
One house-buyer who tried this failed when the matter came to the Court (and yes, HM Revenue & Customs will go to court over this transgression). The total price was £258,000, and the SDLT was paid on the basis that £8,000 related not to the house but to “chattels”. After some argument, this was accepted apart from £800 worth of built-in cupboards in the garage. The result was that for that £800, the SDLT went up from a hoped-for £2,500 to £7,524. So getting your facts right and close attention to detail is clearly vital here.
If you want to avoid SDLT altogether, you will be looking at a more aggressive scheme.
Examples include using a non-UK partnership structure. The seller has to set this up, but if it works the result is that the buyer doesn’t buy the property itself, but buys a stake in the partnership. That carries no SDLT at all. There are other schemes involving trusts, though these are a very complex area in themselves
Do these schemes work? Lots of people think they do, though you won’t see HMRC agreeing with that. They can charge penalties on top of the SDLT if the scheme doesn’t work so you must consider this risk.
You should also be aware that the Solicitors Regulation Authority has come out against them as well, warning solicitors that they could face disciplinary action if they promote or facilitate SDLT schemes. If you are tempted to use such a scheme, make sure you completely understand the risks and that and you choose advisers carefully. You need to have total confidence in them. Finally, note that the Finance Act 2013 will bring in a General Anti-Abuse Rule that is meant to stop a lot of tax schemes from working, even if there isn’t a specific rule in the tax law banning the scheme in question.
So it really is a case of buyer beware.
Adrian Widdowson is a tax consultant at Garbutt and Elliott, which has offices in Leeds and York, www.garbutt-elliott. co.uk. For more details on Stamp Duty Land Tax visit www. hmrc.gov.uk.