The buy-to-let market received a much needed boost this week after the government announced it would cut the stamp duty involved in buying multiple residential properties, potentially unlocking £7.5bn of investment into the private rented sector. This change will encourage more professional landlords and larger institutional investors to build up their portfolios, increasing the supply of private rented houses to the market.
This change in the budget means stamp duty will be charged on a group of properties at the average rate and not the sum total rate as was previously
We were involved in a purchase a few years ago whereby the property purchase price was £1.1m. It was two blocks of six flats held on two freehold tittles.
Ordinarily there would be a stamp duty payable of 4% – at that time, this has now been increased to 5% – on this transaction which would come to £44,000.
What was suggested was for the purchase to be split into six leases and two freehold titles. This reduces the average unit price to £183,000, this means on each transaction only 1% stamp is to be paid so only £11,000 in this case. Overall this reduces the stamp duty by £33,000. The exchange of each flat was done on different days to attempt to de link the transaction.
This purchase would be for six leasehold flats and two freehold titles which would be held in another name besides that of the purchaser.
It is not enough, simply to split the contracts, the transaction must be deemed to be de-linked.
There are various definitions given on the HMRC web site, one of them being as follows:-
Sometimes a purchase is followed by one or more related purchases. If there’s something to link all the transactions together then they’re treated as linked purchases for SDLT. There’s no limit on the length of time between the transactions.
This means if you purchase a property from a builder at £180,000 you pay 1%, if six months later you purchase another one you then pay 3% on £360,000 which comes to £10,800!
I wonder how many fell foul to this rule and didn’t even realise. The new higher stamp duty rate is coming into effect from 6th April. The new relief is expected to apply from this summer when the 2011 Finance Act comes into effect.
Personally I’m not sure how much interest a 4% drop in purchasing costs of property would bring. Though if pension funds or other institutional investors are working according to pre defined models this may tip the balance. Either way this is a welcome change and an overdue change. The British Property Federation (BPF), which had campaigned for the change, said it would tip the balance in encouraging institutional funds into building homes. “Using the average price is fairer and a welcome measure of support for those in need of rented housing,” said Ian Fletcher of the BPF.
The chancellor also announced the introduction of three new antiavoidance measures to address the abuse of stamp duty land tax (SDLT) rules. Experts still believe the clampdown will not eliminate SDLT planning for wealthy homebuyers. After all the politicians need to use some of these loop holes too.
The two prominent ones which were popular were known as the spouse sub sale and one using Islamic finance. The Candy brothers used one such scheme in the selling off their development in One Hyde Park, where penthouses cost £100m each. According to a leaked email one of the brothers wrote to the representatives of one of the penthouse buyers:
‘There is no downside to trying the structure There will be no additional costs other than legal fees and interest (if the structure fails). There will be no penalties! The upside to your principal is a £5,000,000 saving.’
The Inland Revenue has 9 months from date of submission to investigate any queries. This is why when doing any kind of stamp duty savings scheme it is wise to hold the professional fees in an escrow account for a 9 month period before releasing them to the advisor.
MD Sow & Reap