The property market in England and Northern Ireland has now had a month to get used to Chancellor Rishi Sunak’s temporary cut in stamp duty land tax (SDLT). As a result of this cut, no SDLT is payable on sales of residential properties valued at up to £500,000 for the period from 8 July 2020 to 31 March 2021.
People buying second homes and landlords will also benefit from the reduction, although they will still have to pay the 3 percent surcharge which applies to additional properties.
Different rules apply in Scotland and Wales, which set their own land taxes.
As expected, the prospect of reduced SDLT bills on property acquisitions has acted as a spur to the residential property market in England and Wales. Estate agents are reporting a flood of properties coming on to the market, with vendors’ expectations reflected in higher asking prices. Whether that translates into an SDLT-driven boost in completions at higher values remains to be seen.
But other factors are also becoming apparent.
Big rewards when moving to more expensive properties
First-time buyers, who previously had a £300,000 SDLT threshold, will only benefit in more expensive areas. While the average price paid for a first-time home in England is around £210,000, in London the equivalent figure is approximately £425,000. At that price, the increased SDLT threshold produces a saving of £6,250.
For homeowners thinking of moving to more expensive properties, the temporary SDLT reduction could offer big rewards. With the new rules offering a £15,000 tax saving on buying a £500,000 property, estate agents are reporting record demand in commuter towns around big cities, particularly London.
Difficulties in securing a mortgage
For many first-time buyers and second steppers, the picture is complicated by difficulties in securing a mortgage. Even if they are now working full time, applicants who have been furloughed or are engaged in what is perceived to be a high-risk sector such as casual dining, are reporting extra steps in the application process and delays in decision making by lenders.
For many purchasers, securing the SDLT saving while it lasts has been of paramount importance. There’s now a grim awakening as problems in obtaining mortgages move to the top of the list.
SDLT holiday benefits
Second-home owners and buy-to-let landlords will also benefit from the raised threshold although they will still be required to pay the 3% SDLT surcharge.
Benefits for second-home owners
With working from home – wherever that may be – set to continue for many people for the foreseeable future, the decision to buy a second home will be driven by personal considerations. If the decision goes in favour of buying a second home, then the SDLT saving will be a welcome sweetener.
Benefits & opportunities for buy-to-let landlords
For buy-to-let landlords, the position is more complex. Aside from the question of whether a mortgage can be obtained if one is needed, it seems unlikely that the reduction in acquisition costs represented by the SDLT cut will compensate for the other adverse tax changes which have come into force over recent years.
However, those who can buy mortgage-free may decide to adopt a watching brief until the New Year. If a mortgage famine means that current hopes for a residential property boom are not met, then asking prices may decline as 31 March 2021 looms. We may then see more second-home owners and buy-to-let landlords enter the market.
It may also be possible to turn the SDLT holiday into a permanent income tax break. Buy-to-let landlords who are married or in a registered civil partnership may enjoy an unexpected benefit from the SDLT holiday.
The legal rules for a couple owning a property can be confusing. Where a property is owned jointly, it may be held under a ‘joint tenancy’ or as ‘tenants in common’. Under a ‘joint tenancy’, each owner has equal rights and obligations so, if one owner dies, their interest in the property passes to the surviving joint owner automatically. If the ownership of the property is not split 50:50, it is likely that the property is owned as ‘tenants in common’, with the desired split of ownership specified.
For married couples or civil partners who own a buy-to-let property, HMRC’s standard policy is to split any rental income on a 50:50 basis. As a result, any rental profits are taxed equally for each spouse or civil partner, unless a separate election is made. This is HMRC’s default position, even if the property is owned as ‘tenants in common’ in different proportions.
Unfortunately, that standard treatment is not always good news for the couple from a tax perspective. For example, if one partner earns more than the other, it often makes sense for the lower earner to receive more of the rental profits.
There are two reasons for this. It might be that the lower earner is not fully utilising their personal allowance, or the rate at which they pay tax is lower. Similarly, if one of them is a higher-rate taxpayer and the rental property has a mortgage, they may not be getting full tax relief for the mortgage interest, whereas their spouse or civil partner would.
It can make sense for married couples and civil partners to review how their buy-to-let property is owned while the SDLT holiday is available. If beneficial, they can change the split of ownership and then notify HMRC of the revised ownership proportions.
Normally, SDLT can be a barrier to changing the ownership split of a mortgaged property. Typically, if a property is gifted to someone no SDLT should arise, as no consideration is given for the property. However, if a mortgage is attached to the gifted property, SDLT may be payable if the recipient of the property takes on the mortgage.
Taking on a greater share of the mortgage is treated as consideration for SDLT purposes so, despite no money changing hands, SDLT can be charged. As a general rule, the SDLT holiday does not extend to the 3% ‘additional property’ SDLT charge payable on the proportion of the related mortgage so this is a point to watch.
Fortunately, the 3% ‘additional property’ SDLT charge payable on the proportion of the related mortgage does not apply to spouses and registered civil partners for transfers after November 2017.
Benefit for buy-to-let tenants in common
The current ‘SDLT holiday’ therefore provides a unique opportunity for married couples and civil partners to review their buy-to-let portfolios and change the split of ownership. Depending on the property value, this could be done with no SDLT charge payable, while reducing the couple’s income tax liabilities in future.SDLT Holiday, Tenants in common