How your relationship status can effect the amount of Stamp Duty Land Tax (SDLT) you owe

Who pays stamp duty?

Stamp duty land tax (SDLT) is the tax that should be paid to HMRC on purchases of UK property with a value above a certain threshold. The initial rate applicable can range from 2% to 12% of the total purchase price and will depend on how much you are buying the property for.

In addition to this rate, a 3% surcharge may be due if you already own a property, and another 2% surcharge applies if you’re a non-UK resident at the time of the purchase.

Note that there are different rules for purchases of commercial property, which we won’t be covering here.

How your relationship status impacts stamp duty

If you’re a single UK resident first time buyer, you’ll only pay the initial rate of stamp duty on a purchase and you won’t have to pay any surcharges.

But what if two or more people buy a property together and one party is a first-time buyer while the other isn’t? In this case, first time buyer’s relief becomes unavailable to both parties and the 3% surcharge is applied to the entire value of the property. In other words, both parties are put at a financial disadvantage for buying the property together.

This raises an important and difficult question; who should be responsible for paying these additional costs? The First-time buyer could argue that the Homeowner has cost them their first-time buyers relief, while the Homeowner might argue that they should not be responsible for paying a surcharge on a proportion of property they don’t own. For couples buying together for the first time, this might not be the romantic start they envisaged.

Further, married couples and civil partners are treated as a single entity for the purposes of stamp duty, so if a surcharge applies to one partner, then, it’s applied to the total value of the transaction.

Planning for the future

For those who are already married, there isn’t a huge amount that can be done to avoid the surcharges, as well as the loss of first time buyer’s relief. But engaged couples intending to buy property might think about delaying the wedding until post completion and avert a significant stamp duty bill.

If you aren’t married, one partner could potentially acquire the new property alone so that the purchase is not hit with a surcharge due to it also belonging to the other.

Custom mortgage products, such as ‘Joint borrower sole proprietor’ (JBSP) loans have been used by some couples trying to achieve this. With these products only one partner owns equity in the property while both partners are named on the mortgage. Although it may reduce an initial stamp duty liability it can be a risky option for the reason that if the relationship breaks down, a lender could come after either of them for full repayment of the loan, even though only one of them owns equity in the property, which could have knock on effects on both their credit scores.

It has been suggested that drawing up a separate legal agreement (for example, a ‘Declaration of Trust’, to provide the non-legal buyer with an interest in the equity in the property in future) alongside taking out a JBSP mortgage is a means of retaining first-time buyer stamp duty benefits. This is a common misconception because, for the purposes of calculating stamp duty, we need to look through to who the ‘beneficial owners’ are. Having a separate legal agreement ‘on the side’ which provides rights to equity in the property in future equates to the existence of a beneficial interest, so any surcharges applicable would be applied to the entire value of the property.

Conclusion

Your relationship status can be the difference between paying a large amount of stamp duty and none at all. But equipped with this knowledge, it’s our hope that some of you can make a few decisions a bit earlier and avoid any of the potential pitfalls.

If you’re considering property and would like to know more about the tax implications, you can contact Bearstone here: