Stamp Duty Land Tax – Exchanges of property by “connected persons”
SDLT is charged according to the “chargeable consideration” paid for a property, and the rate varies from 0% for properties costing less than £125,000, to 4% for properties costing over £500,000.
Where properties are exchanged, the tax is calculated like this:
Turner and Hooch each own a house, and they agree to swap houses. Because Turner’s house is worth £130,000, but Hooch’s is worth £150,000, it is agreed that Turner will also pay Hooch £20,000 – this is known as “equality money”.
Turner has therefore paid £150,000 for his new house (the market value of his old one, plus £20,000 cash), and so he has to pay SDLT at the 1% rate = £1,500.
Hooch has paid £130,000 for his new house (the market value of his old house, less the £20,000 “equality money”), and so he too pays SDLT at 1% = £1,300.
There is a nasty trap, however, if Turner and Hooch are “connected persons” – for example, if they are brothers, or father and son:
Where the parties are “connected” this means that the transfers of the two houses are “linked transactions”, and in order to calculate the rate of SDLT, the amounts paid on BOTH transactions are added together. £150,000 plus £130,000 gives £280,000, and this gives a rate of SDLT of 3%, so
Turner pays 3% on £150,000 = £4,500
Hooch pays 3% on £130,000 = £3,900
This is manifestly unfair, and I have seen a number of cases where it meant that family members ended up paying high rates of SDLT for no good reason – after all, exchanges of property are quite common among members of the same family.
The good news is that it was announced in the Budget that this anomaly would no longer apply to exchanges between connected persons, so in our example, Turner and Hooch would pay the same amount of SDLT (at the 1% rate in this case) whether or not they were “connected persons”.
IMPORTANT – This reform will only take effect after the Finance Act 2007 receives “Royal Assent” and becomes law, sometime this summer, so if you are planning to do such an exchange with a relative or other “connected person” in the near future, you might want to postpone it until the Act has been passed!
Overseas Property Owned by a Company
In many cases, UK residents who want to own a property in another country (whether as a holiday home, or as a letting investment, or both) do so through a company incorporated in that country. In some countries this is the only legal way for a foreigner to acquire property, and in other countries there are distinct practical and legal advantages to this form of ownership.
What many people in this position may not realise is that they could well be liable for UK income tax on a “benefit in kind” if they or their family use the property. This arises because directors or employees of a company are liable to income tax where they are provided with benefits by the company that employs them – and even if the individual concerned has not been formally appointed as a director, the tax charge also applies to “shadow directors” (that is, a person who in fact has control over how the company operates).The income tax involved could be quite substantial.
There have been differences of opinion between tax advisers and HMRC as to exactly how this legislation operated and how the charge should be calculated, but Gordon Brown has, I am delighted to say, swept away all this confusion, by announcing that legislation will be included in the 2008 Finance Bill to remove this charge, where all the following conditions are satisfied:
The company concerned is itself owned by individuals
The company’s only or main asset is the property concerned (it looks as if the exemption will only apply to a single property)
The company does not have any other activities apart from owning the property
The purchase of the property was not financed by another company “connected” with the property company
The legislation is not in this year’s Finance Bill because the Government wants to consult on the precise details, but when it is passed, it will be retrospective – it looks as if it will be retrospective without time limits – and HMRC have said they will not seek to tax anyone on this type of benefit in the meantime, if the above conditions are met.
It remains to be seen if those who have already paid income tax on a benefit of this type will be entitled to repayments – my guess is probably not – but if you are currently disputing a liability of this type with HMRC, don’t pay them anything, and tell the inspector to look at Budget Note number 50.
Business Premises Renovation Allowance
This was actually announced in the 2005 Finance Act, but it is only now being activated with effect from 11 April 2007.
There is a 100% allowance for the cost of renovating “business premises” which:
Are in a “disadvantaged area” (that is, Northern Ireland, and other areas designated as development areas by the Assisted Areas Order 2007)
Have been empty for at least one year
The allowance applies to the owner of the freehold, (or a long leaseholder) and is available whether he uses the premises for his own business or lets them to someone else. As usual, there is a fair amount of fine print to deal with, so if you think you might qualify for the allowance ask your tax adviser to check it out for you.
So, I never thought I’d say this, but:
Well Done Gordon!
…you have removed a disgraceful SDLT injustice, exempted a spurious benefit in kind from income tax, and finally introduced a relief you promised us two years ago.