If you’re transferring a share of a rental property to save tax, be aware of a stamp duty surprise
Higher-rate paying landlords often give a share of their rental property to a spouse who pays income tax at the lower rate, as a way to save on income tax and capital gains tax (CGT).
Sounds all good and straightforward… as long as they don’t overlook any impact of stamp duty land tax (SDLT).
One problem with SDLT is that a couple is treated like two individuals – for many other taxes, spouses and civil partners can take advantage of special rules. If a couple gets divorced there is a concession, but otherwise if an individual transfers a share of a rental property to their spouse, SDLT will be payable on any monetary consideration.
What if the share is transferred as a gift? If the property is subject to a mortgage secured on it (highly likely), the lender must be informed. The new part-owner will be required to be included in the mortgage documents, meaning that part of the debt is legally transferred to them. The value of this debt could also trigger a SDLT bill if it exceeds the nil-rate threshold, which varies depending on whether the property is in England, Scotland or Wales.
An example:
Mr B owns a buy-to-let property, which is subject to a £250,00 mortgage, and gives a 50% share to his wife. She then becomes jointly responsible for the mortgage, despite the fact that it is still her husband who is making the monthly repayments. HMRC treats this as £125,000 consideration given by Mr B and, because it is the couple’s second property, there will be a SDLT bill of £3,750 (£125,000 x 3%).
The Bs could achieve the same income-tax saving without the SDLT, though. How? Well Mr B could transfer a smaller share of the property and mortgage to Mrs B, so the liability is under the nil-rate limit, but 50% of the income tax charge would still shift to his wife.
Another tip would be for the couple to create a formal partnership to own the property rental business. Not only could they share the income pretty much how they wanted, but because of special rules that apply to transfers of property to partnerships, they could avoid a SDLT charge altogether.
SDLT can be an unexpected surprise if you’re transferring part of a property intending to save on your tax bill. But there could be opportunities to mitigate its impact if you are able make use of some of the tips and tricks available.
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