There are 4 steps to learning about how to invest in property in the UK. This may sound...
Stamp Duty Land Tax (SDLT) is something every property investor has to deal with at some point. It’s also one of the least understood taxes. Since its inception in 2003, SDLT has seen countless adjustments as governments attempt to achieve policy goals. Add in the (currently) 49 different exemptions, exceptions and reliefs which exist in the legislation and it’s no wonder people get confused.
So how do you avoid common errors, how can you save, and what are the exceptions? This article shares all.
Stamp duty land tax misconceptions
Few people realise that SDLT is a self-assessed tax, which means the responsibility of ensuring the correct amount is paid lies not with the solicitor or financial adviser, but with the buyer themselves. Underpay, and you can expect a letter from HMRC in due course. Overpay, and it’s down to you to spot the error and make a claim for a refund within a strict time limit.
And those errors are more common than you might think. According to our partners at Cornerstone, as many as one in four people may have overpaid SDLT on their purchases, based on their own experience and client base. To date, Cornerstone have reclaimed over £15 million in total on behalf of their clients.
But why are errors so common? Interestingly, HMRC’s own calculator bears a significant portion of the blame here. Designed to be a ‘guide’ according to an HMRC spokesperson, it is seen by many, including solicitors and other property professionals – as a detailed calculation. Unfortunately, it fails to take account of many variables which can impact the final SDLT cost, hence the preponderance of errors that have occurred.
How to avoid overpaying stamp duty land tax
Ensuring that you have paid the correct amount of SDLT could be one of the biggest savings that you could make when buying a property. Here are just a few significant factors that could impact your SDLT bill:
If a property doesn’t have a kitchen or bathroom, electrics and utilities are turned off and the fabric of the property is unstable, then under the Housing Act 1957, it may be deemed as non-habitable.
If this is the case, you could qualify for relief, which will potentially reduce your SDLT bill by a significant amount. It’s worth noting that this applies equally to commercial as well as residential property.
Key considerations - The property must require more than a modest amount of work and cannot be easily “fixed up” to meet non-habitable standards. The more reasons you can demonstrate why it can’t be lived in, the more likely it is to qualify.
2) Mixed-use properties
Properties classed as Mixed-Use benefit from significantly lower rates of SDLT. If the property you're buying has some form of woodland or a paddock for example, or commercial buildings. Wayleaves - are another common feature – this is where there are utilities running a cable over the grounds quite often with an agreement to pay a small fee. This can also include London properties where there’s a communal garden.
Key considerations - Make sure you look closely at the property you are buying to see if there are any factors that may make it ‘Mixed-Use’. Basically, anything which isn’t directly related to the actual dwelling part of the property – like commercial land, outbuildings etc. – may see the property qualify for this relief.
3) Multiple Dwellings Relief (MDR)
If you purchase multiple properties in one transaction, you can claim a relief on the total SDLT payable. Introduced in 2011, the purpose of MDR was to encourage buy-to-let investment in the property market. Essentially, when multiple properties form part of the same transaction, MDR works by taking an average of the combined purchase prices and then calculating SDLT liability based on that average value.
Obviously, the more significant the range of purchase prices/property types in the transaction, the larger a saving may be made by the application of MDR. The relief may also apply to situations that aren’t immediately obvious – for example, where a property has a fully self-contained annexe or where a larger property is properly split into separate dwelling areas as a House in Multiple Occupancy (HMO).
Key considerations - Make sure that all properties form part of the same transaction, and consider the differences in purchase price between them, which will impact the potential size of saving you can make.
4) Higher Rate Charge on additional property purchases
Also known as the 3% Surcharge, this amendment introduced in 2016 actually had the opposite legislative intent to MDR, though didn’t replace it on the statute books. The surcharge is a complex part of already complex legislation, and has caused a massive amount of confusion on the part of solicitors and investors as to when it is or is not payable.
There are considerations to be made – if an additional residence later becomes your main residence and the old residence is disposed of, a refund of the surcharge is available if this occurs within three years of the original purchase. This refund window may also be extended if delays to such disposition were due to the extraneous factor of Covid-19.
You should also note that the Higher Rates for Additional Dwellings (HRAD) does not apply to larger transactions for six or more residential properties in one go, which are classified as non-residential.
Key considerations - Make sure you thoroughly explore all the relevant details of the transaction to be clear as to whether the surcharge is payable. Based on the above, if you think you may have overpaid in the last four years, there may be an opportunity to request a refund directly from HMRC for the amount overpaid. However, the best chances of success are to make claims within a 12-month window of purchasing.
Exemptions to SDLT
There are certain very specific situations where the SDLT due on a property transfer is zero.
Examples include a transfer of property where no money or other consideration changes hands as part of the transfer, where a property is inherited by means of a will or where a property is transferred as part of divorce or marriage dissolution proceedings. Properties purchased for less than £40,000 are also exempt, as are properties bought for £250,000 or less by First Time Buyers (note that in the case of a couple, BOTH parties must be First Time Buyers to benefit from this exemption).
Key considerations: If you think that your transaction may be exempt, investigate thoroughly to make sure – the rules are strictly applied and the penalties for not paying due SDLT can be harsh.
Maximise relief on stamp duty with the right property
SDLT is complex and so to minimise your costs and ensure you pay only what is due, we recommend seeking the advice of specialists (like Cornerstone Tax Advisors).
You can take the first step yourself by carefully researching properties to find one with characteristics that fit with the examples above. With tools like Nimbus, you can quickly find opportunities, qualify them and connect with vendors and key specialists.
Trusted by thousands of property entrepreneurs, Nimbus Maps enables property investors and professionals to find the best off-market opportunities and make decisions quickly and with confidence.
See our property intelligence platform in action: Book a demo today.
For a free, no-obligation review of any deals, pre or post-completion, simply complete the form for a Cornerstone Tax Advisor to contact you.