Stamp Duty on equity purchase?

phils73

My sister is divorcing her husband. She is looking to buy out her husbands 50% equity in the family
home as part of the settlement, but needs to finance .

I am prepared to Loan her the money to pay off the husband in the settlement, and in we will create a deed of trust as tenants in common assigning me % ownership share in the house for the loan. Essentially the loan will only be repaid once the house is sold (with potential appreciation in the equity stake)

Will the above transaction be subject to stamp duty if the amount paid is £80,000. I know this is below the SDLT thresholds, but will I be liable for 3% SDLT as his is not my primary residence (I own 2 other properties including my primary residence)

[Deleted User]

phils73 said:

My sister is divorcing her husband. She is looking to buy out her husbands 50% equity in the family
home as part of the settlement, but needs to finance .

I am prepared to Loan her the money to pay off the husband in the settlement, and in we will create a deed of trust as tenants in common assigning me % ownership share in the house for the loan. Essentially the loan will only be repaid once the house is sold (with potential appreciation in the equity stake)

Will the above transaction be subject to stamp duty if the amount paid is £80,000. I know this is below the SDLT thresholds, but will I be liable for 3% SDLT as his is not my primary residence (I own 2 other properties including my primary residence)

Is it a loan if you’re actually buying a share of the property? A loan would involve you placing a charge against the property not becoming an owner. Done that way wouldn’t attract the higher rate of SDLT whereas doing it your way where you will become a beneficial owner will attract the higher rate of SDLT. 

phils73

Thanks for the feedback, so it sounds better to position as a loan rather than equity purchase to avoid SDLT liability. My sister, however, doesnt want to have a monthly interest repayment, and was willing to give up some equity as an alternative to accruing regular interest.
Given this, would it be legal to write a loan advancing the capital amount required, and then deferring any interest payments for a fixed period of 6 years. At the end of 6 years, interest will be levied using an equity-equivalent calculation e.g. if the original capital advanced equalled 20% of the valuation at the time, the total capital and interest repayable would be calculated according to 20% of the then current valuation, potentially with a 'not less than' the original capital advanced clause. Appreciate this makes the interest variable with downsize risk and upside opportunity, but would this be legal without taking an actual ownership share in the property, but just registering a charge for the capital advanced as security, and not be seen to be circumventing SDLT?

[Deleted User]

phils73 said:

Thanks for the feedback, so it sounds better to position as a loan rather than equity purchase to avoid SDLT liability. My sister, however, doesnt want to have a monthly interest repayment, and was willing to give up some equity as an alternative to accruing regular interest.
Given this, would it be legal to write a loan advancing the capital amount required, and then deferring any interest payments for a fixed period of 6 years. At the end of 6 years, interest will be levied using an equity-equivalent calculation e.g. if the original capital advanced equalled 20% of the valuation at the time, the total capital and interest repayable would be calculated according to 20% of the then current valuation, potentially with a 'not less than' the original capital advanced clause. Appreciate this makes the interest variable with downsize risk and upside opportunity, but would this be legal without taking an actual ownership share in the property, but just registering a charge for the capital advanced as security, and not be seen to be circumventing SDLT?

It would be legal but it would still attract the higher rate of SDLT because you’d have a beneficial interest in the property as the loan repayment would be tied to the value of the property. 

AdrianC

If you buy her husband's share, then you are a part-owner, and pay SDLT.
If you lend her money, you aren't and don't.
You can structure the loan however you want - interest, repayment schedule, whatever. Nothing says you HAVE to charge her interest or have monthly repayments.

[Deleted User]

AdrianC said:

If you buy her husband's share, then you are a part-owner, and pay SDLT.
If you lend her money, you aren't and don't.
You can structure the loan however you want - interest, repayment schedule, whatever. Nothing says you HAVE to charge her interest or have monthly repayments.

The OP would be a beneficial owner if he tries to structure the loan such that any repayment is tied to the value of the property. 

SDLT_Geek

Lover_of_Lycra said:

AdrianC said:

If you buy her husband's share, then you are a part-owner, and pay SDLT.
If you lend her money, you aren't and don't.
You can structure the loan however you want - interest, repayment schedule, whatever. Nothing says you HAVE to charge her interest or have monthly repayments.

The OP would be a beneficial owner if he tries to structure the loan such that any repayment is tied to the value of the property. 

Do you have any authority for this?  Perhaps you have been misled by the loose bit of guidance in HMRC's manual here: https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm09764 where it says: 

"Where an individual (who is not a spouse or civil partner of any purchaser) is one of the purchasers of a dwelling but will have absolutely no beneficial interest in the property, they will not be treated as a joint purchaser of that dwelling. This would have to be evidenced in writing. Any future entitlement to capital proceeds from the sale of the property, to income or to occupy the property would mean that they do have a beneficial interest."

I do not take that as meaning that someone with the benefit of a loan, the amount of which is linked to the value of the property, has a share in the property.  That would make a lot of equity based loans, including some Government ones, shares in the property, which is not right.  

Take Help To Buy.  That works by a second legal charge over the home bought with the help of an equity loan from the Homes and Communities Agency.  The HCA does not, as a matter of property law, own a share in the property.  https://www.helptobuy.gov.uk/documents/2015/12/equity-loan-buyers-guide.pdf/  This makes it crystal clear that the individual is "legal owner with 100% title".  

It also says "The Agency’s entitlement to a share of the future sale proceeds is secured through a second charge on your home. This is done in the same way that your mortgage lender will secure its lending through a first charge on your home."  There is nothing in law to stop an equity loan operating as a loan.  For the purposes of SDLT the property law analysis is followed.

Edit: Just to add some new paragraphs to break up one big block.

SDLT_Geek

I think @AnotherJoe has done an equity based loan without acquiring a share in the property.

[Deleted User]

SDLT_Geek said:

I think @AnotherJoe has done an equity based loan without acquiring a share in the property.

There was a thread a couple of months ago on a very similar vein and I believe Average Joe has since ripped up the loan agreement. 

There was also some discussion about why it was different for HTB Equity Loan. I can’t find the thread right now but I’m sure I didn’t imagine it. 

There’s also this:

https://uk.practicallaw.thomsonreuters.com/3-202-2697?transitionType=Default&contextData=(sc.Default)&firstPage=true

getmore4less

"legal owner with 100% title". 

the issue is beneficial interest not legal interest.
 There will be some SDLT exemption for the equity loans and shared ownerships buried in legislation.

 on the last long thread on this it was confirmed private equity based loans are subject to SDLT and someone said they were thinking of ripping up their loan agreement and converting it into a retrospective gift.

ITs not just SDLT also subject to CGT assessments.

getmore4less

Xposted  with LoL I can't find that thread....  same memory on the ripping up.

This is what HMRC say about beneficial interest in the CGT manual ( my bold  as it applies to loans based on equity)
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg70230

Each case must be considered in the light of its own particular facts, but the following are indicators that a person has beneficial ownership of land:

• they hold legal title (in the absence of any contrary evidence the legal owner will normally also be the beneficial owner);
• they occupy the land;
• they receive any rental income from the land;
• they provided the funds used to purchase the land;
• they received the sale proceeds from a disposal of the land.