Stamp_ duty_ holiday_ –_ implications_ for_ transferring_ ownership_ of_ mortgaged_ properties_ to_ spouses
On 8 July 2020, the Government announced a stamp duty holiday for the first £500,000 of any consideration for the acquisition of a residential property until 31 March 2021.
We are waiting for detailed guidance but based on our reading on what is currently in the public domain, we outline below an opportunity for married couples to move mortgaged residential properties between themselves before 31 March 2021 without a significant SDLT exposure.
Married couples (for these purposes include civil partnerships) may wish to transfer the ownership of properties between themselves for a variety of reasons. E.g. to give security to both partners, plans to separate or divorce OR to reduce income and capital gains tax because one spouse pays tax at a lower rate than the other.
The transfer of assets between spouses who live together is exempt from capital gains tax. On a subsequent sale to a third party, the transferee spouse pays capital gains tax on their share of the proceeds less their share of the original cost of the property. Each spouse gets their own annual exemption from capital gains tax.
However, Stamp Duty Land Tax is payable on the transfer of property between spouses, based on any consideration given. Normally the property would be gifted, but the share of any share of a mortgage is treated as consideration and SDLT is due based on the normal rates. (A recent concession means that the 3% higher rate of SDLT for second dwellings does not arise on intra-spouse transfers).
Once the property is transferred, any rental profits are split between the spouses and they pay income tax based on their marginal rates less any personal allowances.
If the investment property is already in joint names, the spouses can change the allocation of profits on the property by way of an election filed with HMRC, known as a form 17.
If the investment property is in the sole name of one spouse, the other spouse will need to be added to the title deeds and mortgage, before profits can be allocated. This would require some conveyancing work by a qualified lawyer.
E.g. let’s say Mrs A earns more than £150,000 a year in salaries and also has rental profits of £20,000 per year from a residential investment property she bought in her own name before they married. The property has an outstanding mortgage of £500,000.
Her husband Mr A does not work.
In normal circumstances, the investment property could be transferred into joint ownership and by way of the form 17 election, all the rental profits can be allocated to the husband without any capital gains tax. He would pay £1,500 in income tax on the rental profits of £20,000, but his wife saves £9,000, a net saving of £7,500 per year.
However, the transfer of the property and beneficial interest in the income normally would cost £15,000 in SDLT because of the £500,000 mortgage.
Until 31 March 2021, no SDLT would be due, but the income tax savings would still arise, so giving a narrow window of opportunity to restructure the ownership of mortgaged properties between spouses and civil partners.
Any questions, please contact David Boyd on 020 7383 3200 or visit our tax page.