One of the largest single costs when buying a property is Stamp Duty Land Tax (SDLT).
This is chargeable to the buyer on most transactions valued over £125,000.
To reduce the amount of tax that becomes due, some people have looked to “mitigation schemes” – legal ways of avoiding the tax becoming liable. This article explores some of the schemes that have been used, but of course, now these loopholes are closed.
Undervaluing the property and overvaluing fixtures and fittings
For properties valued at just over the threshold of £125,000, the value of the fixtures and fittings (on which SDLT was not payable) could be inflated beyond their true value. This would take the value of the property component of the sale below the threshold.
For example, if I offered to buy a house for £135,000 I could save £200 (2% of £10,000) if I asked the seller to accept £125,000 for the house and £10,000 for the carpets, fixtures and fittings. I might also offer to share my saving with the seller by increasing my offer price to £135,100.
It is fairly easy for HMRC to identify sales where SDLT might have been over-inflated. If the majority of sales don’t include fixtures and fittings that are valued at a high percentage of the sale price, those that do can be flagged easily. HMRC has the power to revalue the fixtures and fittings component of a sale so that SDLT does become payable.
For the buyer, the possibility of not paying of a couple of hundred pounds in tax might not be worth the risk of being fined for over-valuing fixtures and fittings.
Sub-sales and connected buyers
A sub-sale is the sale of a property in parts (as a series of transactions rather than one) so that no single part exceeds the threshold for SDLT.
For example, by buying a property worth £240,000 as two properties worth £120,000 each, the buyer would avoid paying around £2,300 in tax. Again, some of this saving could be used to incentivise a seller to go along with the mitigation scheme.
Another type of linked transaction is where a connected person buys a part of the larger property and another person buys the other.
For example, John and Jane might be brother and sister. John buys the house for £120,000 and Jane buys the garden for £120,000. Before this loophole was closed, Stamp Duty would not be payable even though if one of them bought the whole house and garden for £240,000, the transaction would be liable to tax.
This loophole has now been closed by treating linked transactions, whether a series of sales to the same person, or multiple sales to connected buyers, as a single transaction. If buyers fail to disclose linked transactions then that failure could amount to tax evasion.
Investigations of tax evasion
Tax avoidance (or minimisation) is legal. Tax evasion is illegal.
HMRC can take a range of measures if they suspect tax evasion.
An investigation will be conducted of your entire tax affairs, as well as those of people or businesses close to you. Complying with their investigation is likely to take up much of your time.
An investigation can be carried out up to 6 years after the date of your property purchase.
If HMRC find evidence of evasion then you could be liable to pay the full stamp duty cost, as well as the same amount again as a fine and both sums subject to interest.
Because property transactions are high value and easy to follow, SDLT evasion is a type of tax evasion that HMRC is particularly keen to investigate and prosecute. Any “benefit” in finding a mitigation scheme (or using one that has already been closed) is usually not worth the time and cost of an investigation, even if the particular loophole hasn’t already been closed.
Expenses of Stamp Duty mitigation
Where a mitigation scheme has not been classed as illegal, putting the scheme into place may require considerable fees. For example, any scheme that structures ownership through offshore companies or trusts requires those companies and trusts to be set up and then maintained.
The small saving in tax is usually not sufficient to pay for these expenses.
Solicitors may also charge more for the conveyancing if a scheme is involved.
Potential impact on mortgage
If you want to buy a property with a mortgage and you wish to use a mitigation scheme, then you will need to disclose the scheme to the lender. Most lenders reject any application where a scheme is proposed.
Legitimate exemptions for Stamp Duty
There exist exemptions for stamp duty becoming liable.
For example, some transfers of property under a Will (to a spouse for example) and transfers as a result of a divorce.