Stamp Duty on Property
Watch out for the traps
MARRIED couples often transfer properties and other assets to each other to save income tax and capital gains tax.
If a husband transfers a rental property (or a share in a property) to his wife there is no capital gains tax payable on the transfer.
The couple may then be able to pay less income tax on the rental income (if the wife has a lower income tax rate than her husband) and will also be able to pay less capital gains tax when the property is eventually sold.
Capital gains tax savings of up to £6,468 are possible because the couple will be able to use an extra CGT exemption and basic-rate band – capital gains that fall within the £35,000 basic-rate band are taxed at 18% instead of 28%.
Transfers of assets between other persons do not escape capital gains tax. For example, a transfer between a brother and sister or between common-law spouses is treated as a disposal for capital gains tax and taxed just like an open market sale.
Although transfers between spouses are exempt from capital gains tax there is another tax you have to watch out for: stamp duty.
If you transfer a property to your spouse there is no automatic stamp duty relief. However, because stamp duty land tax is based on ‘consideration’ (effectively the amount paid for the property), it is possible to transfer a property to a spouse, or anyone for that matter, with no stamp duty land tax being payable.
Louise owns a flat worth £300,000. There is no outstanding mortgage. For income tax and capital gains tax purposes she decides to give a half share worth £150,000 to her husband Philip. If Philip had paid Louise £150,000 he would be liable to pay stamp duty land tax at 1%, ie £1,500. However, because there was no consideration involved, no stamp duty land tax is payable.
However, any couples thinking of transferring properties to each other should remember that consideration includes:
- Cash payments
- Any assumption of liability to pay a mortgage
In other words, even if no money is paid for the property, stamp duty land tax may still be payable if there is a mortgage attached to the property and the new owner assumes responsibility for it.
The stamp duty land tax is paid by the person who assumes responsibility for the mortgage, ie the transferee.
Paul owns a property worth £400,000 on which there is a mortgage of £300,000. He transfers a 50% interest to his wife, Caroline, who assumes liability for the mortgage jointly with Paul. Paul does not charge Caroline any additional consideration.
For stamp duty land tax purposes, the chargeable consideration for the transfer of the 50% share is £150,000 being 50% of the debt liability transferred. A land transaction return must be completed on Caroline’s behalf and she must pay stamp duty land tax at 1% - £1,500.
John’s house is valued at £180,000. This is made up of equity of £90,000 and an outstanding mortgage of £90,000. He sells half the property to someone else (not necessarily his wife, it could be a friend or other family member).
The transferee pays a cash sum equivalent to half the equity and acquires a 50% share in the property. The consideration is therefore the cash payment of £45,000 plus 50% of the outstanding mortgage, totalling £90,000. As this is below the stamp duty land tax threshold of £125,000 no stamp duty land tax is payable.
However, details of the transaction must be reported using a land transaction return because the consideration exceeds £40,000.
Where couples want to transfer property to each other, for example to avoid income tax or capital gains tax, it may be important to take account of the amount of debt attached to the property.
For example, if 50% of a property is transferred from one spouse to the other and no cash consideration is payable, the stamp duty land tax bill will be based on 50% of the outstanding mortgage.
Providing half the outstanding mortgage comes to less than £125,000 (residential property) or £150,000 (commercial property), no tax will be payable.
In other words, a half share in a residential property with a total outstanding mortgage of up to £250,000 can be transferred with no stamp duty land tax being payable.
A half share in a non-residential property with a total outstanding mortgage of up to £300,000 can be transferred with no stamp duty land tax being payable.
Reducing the Mortgage before Transferring the Property
In some cases it may be worthwhile reducing an outstanding mortgage before transferring a property.
Steven owns a property worth £350,000 with an outstanding mortgage of £251,000. He decides to transfer the whole property to his wife Fiona for income tax planning purposes. As things stand, the stamp duty land tax bill will be £7,530:
£251,000 x 3% = £7,530
However, if Steven reduces the mortgage by just £1,000 before transferring it he will take the property into the 1% stamp duty land tax band and the tax bill will fall to £2,500 – a saving of over £5,000!
Although there are generally no stamp duty concessions for married couples, the situation is different where a couple are divorcing, dissolving a civil partnership or splitting up and wish to transfer the property from their joint names into the name of one partner.
Where such a transaction comes about in pursuance of a court order or an agreement between the parties in connection with divorce, nullity of marriage, judicial separation, or the dissolution of a civil partnership it is exempt from stamp duty land tax. As a relief is being claimed, a land transaction return will be required.