My wife owns a mortgage-free rental property in the north of England valued at £250,000. We rent our main residence in London, but plan to buy our own home in the capital in the next couple of years for between £2m and £3m. We would have to pay the higher rate of stamp duty — an additional 3 per cent — because this would be considered a second home. Do we have any viable alternative to selling the rental property? For example, would transferring the rental property to a company allow us to avoid the additional 3 per cent charge on the purchase of our own home?
Emma Cooper-Hedges, associate in the private client and tax team at Withers, says you are right to consider your stamp duty (SDLT) position. Broadly, the higher rates apply to the purchase of a residential property by an individual who already owns another residential property, where each property is worth more than £40,000.
If you purchase your London home while your wife owns the rental property, the higher rates will bite. If neither of you owns a residential property — whether in the UK or abroad — when the London home is bought, the ordinary rates will apply. But the sale of the rental property may give rise to a capital gains tax (CGT) charge if the property has increased in value between the time you bought it and when you sold it.
Joint purchasers are treated as one unit, so if one of you owns a second home, the whole transaction is taxed at the higher rates. Buying your London home in your sole name will not help you. SDLT anti-avoidance rules provide that, for the purposes of determining whether the higher rates apply, one spouse is to be treated as if they were purchasing jointly with the other spouse.
The anti-avoidance provisions do not “pierce the corporate veil”, so where an individual owns, say, a residential property through a company rather than personally, the ownership of that property is not attributed to the individual when determining whether the higher rates apply. But transferring the rental property to a company may create more problems than it solves. Not only does it generate a possible CGT exposure, but there may also be inheritance tax implications to the extent the transfer reduces the value in your wife’s estate.
You also need to think about the SDLT arising on the transfer itself, and the tax implications on a sale of the property since corporation tax would be due and further tax is likely to be due on cash taken out of the company. Tax advice should be sought before any action is taken.
Fortunately, a sale is not your only option. As part of the UK's fiscal response to Covid-19, the nil-rate SDLT threshold increased to £500,000 for residential transactions completed between July 8 2020 and April 1 2021 (the so-called stamp duty holiday). Buying your London home during the holiday period would result in an SDLT saving of £15,000 — assuming a purchase price of £3m.
This may give you the best of both worlds: your wife can retain the rental property while benefiting from a reduction in your SDLT liability (albeit the 3 per cent surcharge still applies). Once you have identified a property, you can check the SDLT position using HM Revenue & Customs’ calculator.
Helen Jones, partner in private client tax services at accountancy and business advisory firm BDO, says you are correct that the additional 3 per cent SDLT charge will apply.
There is a carve-out from the 3 per cent charge where the new property is replacing a previous main residence. However, if your rented main residence in London was a lease of seven years or less on grant, this relief will not be available.
Failing this, one way the 3 per cent additional charge may not apply is if you and your wife own only a single property at the date of completion of the purchase of your new main residence. This can be done by selling or gifting the rental property prior to completing the acquisition of your new London home.
If the sale were made to a company that you or your wife controlled for a consideration equal to the market value of the property (£250,000) then although the 3 per cent charge would apply to this transfer with SDLT payable of £7,500, this would be significantly less than the 3 per cent charge you would incur on your new London home.
No SDLT would be payable if you gifted the unmortgaged rental property to an adult, who can be your offspring or another individual — your wife does not count for this purpose.
However, if you do that you need to be aware that there are capital gains tax, inheritance tax and income tax implications of transferring assets to individuals and connected companies, including a capital gains tax charge based on the market value of the property. Any gain needs to be reported to HMRC and tax paid within 30 days of the transaction. In the case of transfers to companies there will be administration costs of running the company which need to be taken into account in making your decision.
As with all decisions of this magnitude, we would recommend seeking independent advice from a tax and legal perspective.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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