Stamp Duty on Transfer of Equity

Berger_3

Hello all,

My wife owns a BTL flat jointly with her Mum, she is remortgaging and at the same time carrying out a transfer of equity to remover her Mum.

No money is changing hands it's just a gift. The new mortgage will be 225k with the property valued at £300k

Trying to read online my understanding is the stamp duty liability is based on the mortgage amount, so I would make it 2% of 100k as 125k is at 0%, so 2k would be payable, however the solicitor makes it £2715.

Does anybody know how this figure is worked out, and which is correct?

Thanks in advance

kinger101

Debt is changing hands, which means there is consideration (i.e., this is akin to money changing hands). I don't really understand what is happening but if MIL is relieving herself of half the property and half the mortgage debt, then the consideration is whatever half the balance of the current mortgage is.

The rate on which is due depends on whether you or your wife owns another property.

You need to explain;
(a) how much debt MIL is relieving herself of;
(b) whether you or your wife own any other residential properties.

MIL will also be liable for CGT, with the sales proceeds being deemed to be the open market value of her share of the property.

Any equity transferred could also potentially be subject to IHT if MIL passes away within seven years of gift.

kinger101

booksurr wrote: »

very simple, I assume you wife and her mother are 50/50 joint owners?

your wife has 2 properties (the BTL + the one she lives in with you as a MARRIED couple) so she has to pay the higher rate on consideration

your solicitor has calculated it as:
225 - 40 = 185/2 = 92.5 x3% = £2,775

however your solicitor is wrong since there is no nil rate band on the first 40k. Initially the guidance was written that way, but the final and definitive guidance makes it very clear that there is no nil rate band once the consideration is in excess of 40k

therefore the correct SDLT she must pay is
225/2 = 112.5 x 3% = £3,375
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/509184/GuidanceNote_Final.pdf

read para 3.44 & 3.45

Well done on working out where solicitor got that figure from.....I couldn't for figure out how they ballsed it up.

Berger_3

Thank you for your responses. The property is currently owned 50/50 with her mum (I assume as joint tennants)

We own the home we live in so my wife owns two properties and I just own the one we live in, are you suggesting she is liable for the 3% second property tax even though she already owns it? I appreciate she will own it completely on her own rather than a share, and that she will effectively be gaining her mums share of that property, but it's not a new property and she will start and end the day that the transfer of equity goes through owning two properties, she will not own an extra property, so I don't get why the 3% should apply?

It's also a remortgage, so they aren't selling it they are just remortgaging it to another mortgage provider while at the same time removing the MIL. So there are no sale proceeds, the MIL will not be receiving anything and visa versa, it's just a case of taking the MIl off so it's just in my wife's name rather than Joint.

kinger101

The additional 3% stamp duty applies. You wife will own more than one property at the end of the transaction. The fact someone increases their share of a property they already own does not exempt them from SDLT.

We have already explained that transferring debt to someone is "consideration". The MIL is getting her debt paid off and you wife if getting half a property for taking on this debt. If there was no debt, it would be a different matter, as it would be an outright gift (but still subject to CGT).

Berger_3

Also, stamp duty on a transfer of equity when you are removing somebody is based in the debt the person coming off of the mortgage is being released from, as this is deemed the equivalent of being given the same amount of money, in this case the liability would be zero as £225k divided by two is below £125k which is below the zero rate band so it does then appear that you are right and the solicitor is applying 3% to the value of the mortgage less £40k.

I really do not get this as the 3% second home tax is based on purchase price of an second home not mortgage value. This is not a second property as she already owns it and owned it before the 1st of April, she will not own any additional properties, yes she will gain a whole property, but the figures then do not make sense if they are calculated on the mortgage value which seems to have been the case? if the property was mortgage free then by that logic (and the Suns used above) she would pay no stamp duty? Why would you have to pay 3% 2nd property tax on a home you already own based on the size of the mortgage you will take on? Surely a the bigger the debt the less benefit you are taking on, and as previously stated stamp duty on a transfer of equity is more related to the outgoing person being released from a debt than the person remaining anyway.

kinger101

What you think, which is entirely illogical, happens to be irrelevant. We've answered your question. The SDLT works the way it's written in statute. Not how you think it should work.

Sorry if my post is blunt, but the amount of tax you should pay is a matter of fact.

Berger_3

I don't mind your post being blunt, if those are the rules then so be it, but despite those being the rules to me it makes absolutely no sense.

Second property tax is 3% of the purchase price on any additional property purchased, that's quite straight forward.

My wife however will essentially pay 3% on the size of her mortgage on a property she already has an interest in.

If she had no mortgage she would gain the benefit of having the whole property and pay no tax.

Regardless of "the rules" do you personally think this is either fair, or makes any sense?

From our own personal perspective we can just very simply leave the MIL on the mortgage and save ourself a few thousand pounds. It just seemed to make sense that as we are remortgaging we may as well take her off as she is only on it because she helped her buy it about 10 years ago and it needed to be joint at the time.

I'm happy to pay tax as long as it's fair, my frustration here is that this new tax was apparently introduced to curb buy to let investors. We are going to be hit by this tax but we are not looking to buy any additional properties and let any additional properties out, furthermore she will have to pay a tax based on the size of our mortgage, so she is being taxed on the size of her debt rather than the value of the share of the property she is taking on, which suggests to me the 2nd property tax has been introduced without any consideration for this scenario, because the calculation being applied doesn't take into account the fact it is a second property, it is based on a calculation that was used before the 3% SDLT was introduced, any reference to the scenario of removing removing somebody from a property does not make allowances for the fact it is a second property, it appears HMRC/ the government have simply forgotten about this scenario and the implications of the new tax.

getmore4less

Think of it as Stamp duty applies when you buy parts of properties even if you own another bit.

When you release someone of the debt they have on a property you are buying that bit off them so SDLT applies to that bit.

You will have to read the legislation in minute detail if you think owning part of the same property secondary SDLT does not apply if you own more than one property.

well established that standard SDLT applies.

booksurr

Berger_3 wrote: »

I don't mind your post being blunt, if those are the rules then so be it, but despite those being the rules to me it makes absolutely no sense.

Second property tax is 3% of the purchase price on any additional property purchased, that's quite straight forward.

no SDLT per se is a tax on any transaction relating to property. Such transactions can be the purchase of a property or a share of a property and in the olden days, when contracts relating to property were on paper, the Land Registry would not update its records until the paperwork was "stamped" to show any tax had been paid

Berger_3 wrote: »

My wife however will essentially pay 3% on the size of her mortgage on a property she already has an interest in.

you misunderstand

Berger_3 wrote: »

If she had no mortgage she would gain the benefit of having the whole property and pay no tax.

correct - but MIL would have to give it to her for free whilst at the same time MIL wil still have to pay CGT

Berger_3 wrote: »

Regardless of "the rules" do you personally think this is either fair, or makes any sense?

you own 2 properties, moreover you already let one of them. That makes you an exceptional part of society and (in their eyes) someone who is ripe for paying more tax back to society because you are "rich"

Berger_3 wrote: »

From our own personal perspective we can just very simply leave the MIL on the mortgage and save ourself a few thousand pounds. It just seemed to make sense that as we are remortgaging we may as well take her off as she is only on it because she helped her buy it about 10 years ago and it needed to be joint at the time.

as you haven't also expressed outrage on this I am unsure if you understand that your actions also mean MIL must pay CGT on the share of the property she is giving to your wife.

Berger_3 wrote: »

I'm happy to pay tax as long as it's fair, my frustration here is that this new tax was apparently introduced to curb buy to let investors. We are going to be hit by this tax but we are not looking to buy any additional properties and let any additional properties out,

no, the tax was introduced to make people consider returning BTL properties back into residential use. To that end the great unwashed British public will see it as very fair that a "fat cat" such as your wife has to pay tax if she wishes to continue being rich

Berger_3 wrote: »

furthermore she will have to pay a tax based on the size of our mortgage, so she is being taxed on the size of her debt rather than the value of the share of the property she is taking on,

again you have misunderstood. SDLT is based on the SHARE of the property she is taking on. She is taking on 50%. In order to do so she has a remove 50% of the mortgage liability from MIL. So yes, mathematically she is being taxed on the size of the debt, but that is not the underlying principle. the 50% driving the calculation is the share of the property. If it were tenants in common and MIL only had 10% then she would only have 10% applied to the mortgage - again all explained in guides if you read https://www.gov.uk/guidance/sdlt-transferring-ownership-of-land-or-property

Berger_3 wrote: »

which suggests to me the 2nd property tax has been introduced without any consideration for this scenario, because the calculation being applied doesn't take into account the fact it is a second property, it is based on a calculation that was used before the 3% SDLT was introduced, any reference to the scenario of removing removing somebody from a property does not make allowances for the fact it is a second property, it appears HMRC/ the government have simply forgotten about this scenario and the implications of the new tax.

no they haven't. They have very precisely ensured that your scenario is included because the principle is to make you think twice about selling up not adding to your property portfolio

the rules about how to calculate chargeable consideration on mortgage liability have been around for donkeys years anyway

Berger_3

I take exception to the suggestion that me or my wife are "rich" or "fat cats" She has owned it jointly for the best part of 10 years. It was bought not long before the crash, and like my own property was in negative equity until recently. She lived there until three years ago until she moved in with me. We've only recently sold my flat that also spent about 5 years in negative equity and bought a place together. We've done our time and between us had to live the best part of 20 years in our respective flats before the market recovered sufficiently for us to be able to move on. We actually had it up for sale until recently but it didn't get any interest at price that would've made 10 years of ownership worthwhile with the equity she would've received from it so have decided to keep it on.

With regards to CGT I have done the calculations a number of times and because of the length of time owned and the length of time rented out and value of the mortgage I make it that Zero tax is payable, so if there was no mortgage no tax would be payable by her mum or her, as mentioned it's been owned for the best part of 10 years and has not risen in value a great deal comparatively so it isn't as if they are professional property flippers who have made a fast buck!

Even more bizarrely if they sold the property and bought another they wouldn't have to pay the 3% tax as they would be replacing one with another, http://www.theguardian.com/money/2016/may/12/will-higher-rate-stamp-duty-apply-if-my-ex-wants-to-buy-me-out so I'm not quite sure how your comments stack up in light of that and how clobbering people caught up in this scenario with the 3% tax is really in the spirit of the new legislation.