Stamp Duty and a Second Home

[Lootman]

My youngest son owns his own home in London. His girlfriend rents. They want to buy a home to live in together whereupon my son would rent out his existing home. So far so good.

But because this would count as a second home for my son, an extra 3% of stamp duty would be due on the purchase. And not just his share, but the whole amount. That will cost them upwards of 30K in tax.

So their idea is that she will buy it in her sole name. The mortgage would also be in her sole name but my son would contribute half the down payment. Obviously this is not ideal and involves some risk, but the tax saving is considerable.

And so the question. If at some later time they want to put the property in joint names (which would effectively be a gift from her to him of 50% of the property) could there be any problem with a claim from HMRC for "retrospective" stamp duty?

About a decade ago somebody gifted me a 50% share in a house and, at least at that time, no stamp duty was levied. Presumably it is computed on the amount of the consideration and not the value of the gift. Likewise I have both donated and received gifts of shares without any stamp duty being due. Has that changed with the recent more aggressive approach to raising stamp duty?

Would they be better to wait a few years before making that gift? Or do it only when a life event happens, like marriage, a baby, or selling his first home? They both have good jobs in the City and are anxious to appear impeccable in how they handle this. They are also anxious not to throw money away on stamp duty if there is a legal way to avoid it.

[richlist]

They certainly won't be throwing their money away by paying many £000's in stamp duty. The money is needed to pay for schools, hospitals and defence etc etc. If it was so easy to avoid SDLT we'd all be doing it. If it were possible to avoid it the Government would close the loophole. Payment is the only option morally and legally.

Remember, always pay your taxes.

[PinkDalek]

That was a curious reply, given the title of this board.

Not that I have the time to to look up the detail but I trust this board will provide the answers needed, one way or the other.

[PinkDalek]

I meant the subtitle - Practical Issues .

[genou]

And so the question. If at some later time they want to put the property in joint names (which would effectively be a gift from her to him of 50% of the property) could there be any problem with a claim from HMRC for "retrospective" stamp duty?

I don't think they'll get stuck for retrospective stamp duty. The problem will be the mortgage, if it still exists. He will have to acquire a share of the mortgage, and that is consideration, and the transfer will be subject to SDLT. https://www.gov.uk/guidance/sdlt-transf ... r-property. I haven't thought hard about the initial situation, but it looks possible that it would caught by POAT.

[Lootman]

And so the question. If at some later time they want to put the property in joint names (which would effectively be a gift from her to him of 50% of the property) could there be any problem with a claim from HMRC for "retrospective" stamp duty?

I don't think they'll get stuck for retrospective stamp duty. The problem will be the mortgage, if it still exists. He will have to acquire a share of the mortgage, and that is consideration, and the transfer will be subject to SDLT. https://www.gov.uk/guidance/sdlt-transf ... r-property. I haven't thought hard about the initial situation, but it looks possible that it would caught by POAT.

Ah yes, there would definitely be a mortgage. They are only in their twenties. Good point; thank you.

I don't know much about the pre-owned assets rules but I was under the impression that's mainly an issue for inheritance tax. Again, since they are in their twenties I doubt that IHT is much of a concern to them.

[genou]

I don't know much about the pre-owned assets rules but I was under the impression that's mainly an issue for inheritance tax. Again, since they are in their twenties I doubt that IHT is much of a concern to them.

If it is caught by POAT, your son would be subject to an annual Income Tax charge unless he pays rent.

[Lootman]

I don't know much about the pre-owned assets rules but I was under the impression that's mainly an issue for inheritance tax. Again, since they are in their twenties I doubt that IHT is much of a concern to them.

If it is caught by POAT, your son would be subject to an annual Income Tax charge unless he pays rent.

Ack. Do you mean at the point where he starts living there or at the point where he is put on the title deed?

If you are correct about that then it is most unfortunate. I will read up on POAT, thanks.

Another idea might be to leave the property in her sole name but create a deed of trust giving my son a financial interest in the property, without being on the title. Far from ideal, however.

[Spet0789]

What is being proposed is pretty straightforward evasion.

Your son owns a house. Parliament’s intention was that if he wants to accumulate interests in more properties he needs to pay higher stamp duty. This is because hundreds of thousands of younger people can not afford to buy because others are hoarding property and exploiting the scarcity created by our planning system. Any contrived scheme to circumvent this higher stamp duty is certainly immoral and probably illegal.

Consider the life lesson you are teaching your son. Did you help him pick his first lock? Show him how to mug old ladies?

Aside from the morality, if his relationship were ever to break down, he has no practical way to enforce his part ownership of the property. All his ex would have to do is to shop him to HMRC and game over.

[genou]

Ack. Do you mean at the point where he starts living there or at the point where he is put on the title deed?

If you are correct about that then it is most unfortunate. I will read up on POAT, thanks.

Another idea might be to leave the property in her sole name but create a deed of trust giving my son a financial interest in the property, without being on the title. Far from ideal, however.

Any POAT charge would arise from him living in the property, having contributed to its purchase.

The partner's mortgage provider is not going to sit still for the partner giving away half of their security, and I imagine the mortgage will forbid it. The whole thing looks a terrible mess. I suspect the couple are squarely caught for the higher rate SDLT.

[Lootman]

Any POAT charge would arise from him living in the property, having contributed to its purchase.

I have no reason to doubt that but at the same time I find such a provision to be very odd indeed. I can certainly understand that his contribution to her to buy the home might not be a PET, since he derives the benefit of living there. But I am at a loss to understand the purpose of charging him tax simply for living there, unless he pays rent. In practice I imagine he would make a monthly payment to her for his share of the running costs anyway.

The partner's mortgage provider is not going to sit still for the partner giving away half of their security, and I imagine the mortgage will forbid it.

Yes, I accept that. These days mortgages seem to be refinanced every 2 to 3 years so I imagine that they'd have to wait until they need a new loan before making any change to the title.

Of course I could give them a bridging loan for the time they wish to do that, but I'd prefer not to get involved. I already helped him buy his first place.

[JonE]

Any POAT charge would arise from him living in the property, having contributed to its purchase.

I have no reason to doubt that but at the same time I find such a provision to be very odd indeed.

Happily, I have no experience of POAT but it seems to me that significant ducking & diving was observed with regard to IHT (especially) so, to counter those abuses of the wording of the relevant laws, POAT was introduced to support the intent of those laws. To have very precisely targeted the POAT rules would have been an invitation for ever more 'creative' ways of dodging assessment of 'the right amount of tax' so POAT rules were pretty broadly scoped and are pretty broadly interpreted by HMRC so that they may act as a catch-all.

Unfortunately, this means some transactions are caught by POAT which were never intended as part of some tricksy tax-dodging scheme but happen to share sufficient characteristics with transactions that do/did form part of those dodgy schemes. Tough - though I doubt that there are very many genuinely innocent transactions being caught (the one you describe obviously isn't one such). The dodging & weaving abusers didn't (and don't) care about such collateral damage arising from anti-avoidance measures they have provoked and HMRC aren't inclined to (and probably shouldn't be able to) subjectively treat individual cases in a sympathetic manner.

In practice I imagine he would make a monthly payment to her for his share of the running costs anyway.

So what? That's not rent - and I imagine the "market rent" for his use of this property is high enough that it would exceed the POAT threshold.


Just as an aside on a different topic that has been mentioned, remember that Stamp Duty is a tax on documents but Stamp Duty Land Tax is on the transaction of an interest in land and not merely on a document recording such a transaction.

Cheers!

[Lootman]

Any POAT charge would arise from him living in the property, having contributed to its purchase.

this means some transactions are caught by POAT which were never intended as part of some tricksy tax-dodging scheme but happen to share sufficient characteristics with transactions that do/did form part of those dodgy schemes. Tough - though I doubt that there are very many genuinely innocent transactions being caught (the one you describe obviously isn't one such).

I know what you are trying to suggest there but I believe their initial intent here is fundamentally innocent. A couple are obviously within their rights to elect to buy a property in the sole name of just one of them, if they so choose. There may be many reasons for wanting to do that which have nothing to do with tax, and there is nothing irregular or "dodgy" about that, let alone illegal. In fact my wife and I mostly own assets in our sole names, although our two properties are owned as joint tenants.

The asymmetric way that the government has structured stamp duty means that a couple A and B, who want to buy two homes, are better off each buying a home in sole names, rather than both buying both properties. Why is that not a perfectly legal structuring of one's affairs to minimise a tax liability? Wasn't this question settled with Tomlin's judgement in IRC versus the Duke of Westminster, 1936? (Note A)

Where the problems seem to arise is later, if and when this couple want to change their ownership to some form of joint ownership. And the effect of those complications might be that they never do that, or at least not until they are married or their circumstances are very different.

In practice I imagine he would make a monthly payment to her for his share of the running costs anyway.

So what? That's not rent - and I imagine the "market rent" for his use of this property is high enough that it would exceed the POAT threshold.

Well yes, I suppose it depends how you define "rent". Suppose the house costs 1K a month to run. B gives A 500 a month. Is that a share of the costs or is it "rent"? Either way it is the same payment so call it whatever you want. They could even structure it as a "rent-a-room" arrangement so no income tax is due on the "rent".

It seems ironic that POAT is designed to target IHT avoidance schemes and yet in this case IHT is not a consideration in their thinking at all, because of their age. I am therefore still at a loss to understand the logic of taxing the "imputed rent not paid".

What makes more sense to me is the situation where I gift my child the money to buy a home and then I live there with him. My gift will probably fail as a PET because of the reservation of benefit rule. I can get around that by paying rent.

Note A:

"Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax.

[JonE]

OT: does not address OP's original questions or consider potential relevance of POAT in the circumstances. Mostly general in nature and scope.

I know what you are trying to suggest there but I believe their initial intent here is fundamentally innocent. A couple are obviously within their rights to elect to buy a property in the sole name of just one of them, if they so choose.

Firstly, I've seen that 'buying in the name of' is a form of words that can cause big problems if people actually think of it in that way. It'd be just her buying as the legal owner, of course [1].

Secondly, I don't know what you reckon I was "trying to suggest" but I did explicitly state that I didn't consider the series of transactions you'd outlined as being "genuinely innocent". To qualify as such in my book, the transactions would need to be undertaken without any consideration of tax avoidance aspects dominating the decision whereas you'd declared that there was an intent to structure a series of transactions (even accepting exposure to various other risks) so as to avoid higher rates of SDLT.

What I wrote was, remember, in the context of a "genuinely innocent" transaction being caught by anti-avoidance provisions: collateral damage arising from a clamp-down on avoidance schemes. There is justification for examining a series of transactions and also considering their substance rather than considering each transaction independently and it is used elsewhere such as in considering whether a serial refurbisher of residential property is actually conducting a trade. Intent and overall effect can both be taken into consideration.

...a couple A and B, who want to buy two homes, are better off each buying a home in sole names, rather than both buying both properties. Why is that not a perfectly legal structuring of one's affairs to minimise a tax liability?

I haven't suggested that A & B couldn't each acquire sole ownership of residential properties. Nothing illegal about that concept. Either or both can do so if that suits them better than the other options. Of course, various tax regimes could come into play at different times and some aspects would depend on whether or not A & B are married (or equivalent for the purposes of various taxes[2]) at specific times.

Wasn't this question settled with Tomlin's judgement in IRC versus the Duke of Westminster, 1936?

Tomlin is history! Interesting but no longer a sound source. What he said (more clearly so when read in context) was not that taxpayers had a right to artificially reduce their tax liability but that the tax authorities had no right to artificially impose extra tax. Of significance is that the case dealt with a single transaction. 'Looking through' the superficial presentations of each of a pre-planned series of transactions to base taxation on the true substance of the series is not artificial. The Ramsey principle has been modified and extended by the courts and guidance on the General Anti-Abuse Rule (GAAR) seems ever-evolving. GAAR guidance specifically states that it "rejects the approach taken by the Courts in a number of old cases to the effect that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means, however contrived those means might be and however far the tax consequences might differ from the real economic position". Tomlin is specifically mentioned as one of those old cases which parliament rejected (along with Clyde in Ayrshire Pullman which was my personal favourite for the language he used).

Favouring a tax-efficient choice of action rather than any other valid and reasonable choice isn't a problem. It's the abuse of possible loopholes in law for the purposes of gaining a tax advantage which is the problem which GAAR seeks to address - though there are other mechanisms to address unacceptable avoidance which isn't clearly abusive in nature. 'Abuse' involves relying on the letter of the law to duck the intent of the law by making arrangements contrived mainly or solely to gain a tax advantage.

Note that I am not suggesting that the circumstances you've outlined and GAAR are in the same ball-park: just wandering into territory you sign-posted with mention of Tomlin.

Cheers!

[1] Veering towards being on-topic, given that she'll need a mortgage when buying in her sole name, will she be able to meet affordability and other criteria for the loan and might she encounter difficulties with certifying information she may be required to supply regarding sources of other funds which enable the purchase?

[2] My mention of "for the purposes of various taxes" is because there isn't total consistency across all tax legislation. For example, IT and CGT treat a married couple who are deemed to have separated as if they are not married (certainly in subsequent tax years but not consistently so in year of separation) whereas IHT looks to their legal status and treats them as married.

[Lootman]

I know what you are trying to suggest there but I believe their initial intent here is fundamentally innocent. A couple are obviously within their rights to elect to buy a property in the sole name of just one of them, if they so choose.

I don't know what you reckon I was "trying to suggest" but I did explicitly state that I didn't consider the series of transactions you'd outlined as being "genuinely innocent". To qualify as such in my book, the transactions would need to be undertaken without any consideration of tax avoidance aspects dominating the decision whereas you'd declared that there was an intent to structure a series of transactions (even accepting exposure to various other risks) so as to avoid higher rates of SDLT.

Ha, yes, I did "declare" that as it was a part of my question here. But obviously in a real world situation there would be no such declaration made, and so any inference made about the non-innocence of the transaction(s) would have to be made on other grounds. And as you say elsewhere in regard to buying in a sole name: "Nothing illegal about that concept. Either or both can do so if that suits them better than the other options".

Favouring a tax-efficient choice of action rather than any other valid and reasonable choice isn't a problem. It's the abuse of possible loopholes in law for the purposes of gaining a tax advantage which is the problem which GAAR seeks to address - though there are other mechanisms to address unacceptable avoidance which isn't clearly abusive in nature. 'Abuse' involves relying on the letter of the law to duck the intent of the law by making arrangements contrived mainly or solely to gain a tax advantage.

I can see that if in this case there were a sequence of transactions which, taken together, might be seen as motivated by tax avoidance. But at least any time soon, there would only be one transaction - the purchase. I would assume that the more time that elapses before any second transaction, the harder it would be to argue the sequence was pre-meditated. And of course various life events in that time might drive future decisions e.g. marriage, childbirth, separation etc.

Veering towards being on-topic, given that she'll need a mortgage when buying in her sole name, will she be able to meet affordability and other criteria for the loan and might she encounter difficulties with certifying information she may be required to supply regarding sources of other funds which enable the purchase?

Probably. She has a good income, as does he. In fact given that he already has an existing mortgage it may actually be easier for her to qualify for a mortgage on her own. Source of funds is another matter but her parents have means and, given that her father is a high court judge, I doubt it will be anything too dodgy