Citywire for Financial Professionals
Share this page:
Stay connected:

Citywire printed articles sponsored by:


View the article online at http://citywire.co.uk/money/article/a594303

How to reduce your stamp duty bill

Buying a house is expensive enough without adding on stamp duty, but there is one easy, and legal, way you can some times use to cut the tax you pay.

 

by Michelle McGagh on Jun 08, 2012 at 09:30

How to reduce your stamp duty bill

Stamp duty is a significant cost that comes with buying a house, but there is a way to reduce the bill if your home is teetering on a stamp duty threshold.

The thresholds for stamp duty effectively work on a cliff-edge system, meaning if you sell your property for just £1 over a threshold it can increase your bill significantly.

Currently the thresholds are as follows:

  • Nothing on properties up to £125,000
  • 1% on those between £125,000 and £250,000
  • 3% on those between £250,000 and £500,000
  • 4% on those between £500,000 and £1 million
  • 5% on those between £1 million and £2 million
  • 7% on properties over £2 million

This means you can be saddled with a far higher bill just for being £1 over the threshold.

Price Stamp duty Price + £1 Stamp duty Stamp duty for extra £1
£125,000 Nil £125,001 £1,250 £1,250
£250,000 £2,500 £250,001 £7,500 £5,000
£500,000 £15,000 £500,001 £20,000 £5,000
£1,000,000 £40,000 £1,000,001 £50,000 £10,000
£2,000,000 £100,000 £2,000,001 £140,000 £40,000

With such a jump in the amount of stamp duty you'll have to pay, it is no surprise that you find properties marketed at just below the thresholds.

But what happens if you can’t afford to market your property for less than you think it’s worth? The latest figures from the Halifax show house prices fell 2.4% in April, the equivalent of £3,000 for the average home, which is more than the average worker takes home in pay each month.

The average home is now worth just under £160,000, according to Halifax, which would fall into the lowest 1% tax bracket for stamp duty, but in London and the South East the average price is far higher.

When a property is marketed just above the stamp duty threshold, often the seller will be knocked down on price. But if you can’t afford to take less, there is another way to push your property into a lower stamp duty bracket.

Add up your chattels

When a property is sold today it is not uncommon for white goods or even furniture to be sold along with the house or flat. Selling these items, known as ‘chattels’, to a buyer separately from the property but in the same transaction could reduce the stamp duty.

For example, Barbara markets her property for £253,000, which would fall into the 2% stamp duty bracket. Bill offers Barbara £249,000 for her property, which she refuses, but instead of losing a potential buyer she agrees to throw in all the white goods and some furniture that she no longer wants.

The value of the white goods and furniture is around £4,000, so the price of the property to Bill is £249,000 plus he pays another £4,000 for the furniture and white goods.

As stamp duty is only payable on land purchased, the property would fall into the lower 1% bracket, meaning Bill has to pay less.

This is a slightly more complicated way of selling a property, but getting help from a tax solicitor or conveyancer will help, and a good solicitor should be able to draw up a watertight contract for a land and chattels transaction.

What counts as chattels?

When drawing up the contract, the seller must be very clear about what the chattels are. So how do you know what can be classed as chattels?

Chattels, very importantly, are not the same as fixtures and fittings that can reasonably be expected to form part of the property, such as light switches and the boiler, which are not exempt from stamp duty. Chattels that are exempt are ‘personal property’ that do not form part of the land and could be taken away by the seller reasonably, such as beds, white goods and sofas.

When determining whether the item is a fixture and fitting or a chattel, it is worth using some common sense. However, the seller must be careful not to try to pass off thousands of pounds worth of items as chattels to deliberately avoid stamp duty.

David Hollingworth of mortgage broker London & Country said selling chattels as part of a property transaction could help ‘get you to where you need to be when it comes to stamp duty thresholds’, but warned that HM Revenue & Customs (HMRC) would not take kindly to those trying to exploit the rules.

‘Selling chattels may mean you do not have to jump over the [stamp duty] hurdle and pay a significant amount more, but you cannot dump £50,000 on the price as chattels because HMRC will take a dim view of it,’ Hollingworth said.

‘You have to be careful that you are not [using the sale of chattels] to avoid tax.’

Hollingworth said a seller must also be realistic about the market price of the chattels, and that HMRC would be unwilling to accept that the average home had £10,000 worth of curtains.

‘You have to be realistic about big amounts that will be looked at by HMRC. You cannot be seen to be manipulating the market price [of chattels or the property] as that will not wash with HMRC,’ Hollingworth said.

The taxman is watching

Those involved in a property transaction should also be warned that HMRC is not just targeting large-scale tax avoidance, it is also clamping down on avoidance of smaller sums.

As a small shift in the value of chattels can have a large impact on the amount of stamp duty HMRC can take, it is willing to pursue what may seem trivial cases.

A first-tier tribunal heard last month illustrates HMRC’s willingness to pursue individuals. In the case of Orsman v HMRC, Miss Orsman bought a property in Brighton for £250,000 (which fell into the 1% stamp duty band) and she also purchased £8,000 of chattels.

However, HMRC was unhappy with the list of chattels included in the sale, and raised questions over ‘fitted units and worktop in the garage’ which was valued at £800, as well as an electric oven and hob and three semi-fitted wardrobes.

After discussions with HMRC it was agreed that the oven and wardrobes were ‘sufficiently moveable’ not to count as land, but according to HMRC the worktops were ‘land’ as they were fixed on batons and mounted to a wall and could not be removed without damaging the structure of the house.

The tribunal agreed with HMRC, although it noted that HMRC had accepted the up-and-over garage door motor, the front door bell and recessed down lighters as chattels.

The outcome of the case was that Miss Orsman was left with a stamp duty bill of £5,024 to pay.

Hollingworth said: ‘The watchword in the Budget in March and for this government is ‘avoidance’ – they are cracking down on it and you have to have a big cautionary note over any approach that could get you in trouble with HMRC.’

21 comments so far. Why not have your say?

Nigel Bradley

Jun 08, 2012 at 12:28

With respect this article sets out in the headline to do one thing (save SDLT in an easy and legal way) and ends up doing another (warning against avoidance and highlighting that HMRC are willing to challenge these things).

There is nothing new in listing chattels separately but it is certainly true that HMRC are on the look out for avoidance and value attributed to chattels must be very realistic for what are usually "second hand articles" - they must also be really chattels and not fixtures and fittings as your article points out.

report this

Michael Bailey

Jun 08, 2012 at 12:32

Sadly in my experience many solicitors (and estate agents) actively discourage buyers and sellers from using this tactic even though, so long as the chattels are not over valued, it is totally in order to do so.

report this

Jonathan

Jun 08, 2012 at 12:44

Stamp duty tax bands are ridiculous. A £1 increase in purchase price from £250,000 to £250,001 results in an extra £5,000 tax.

Why do HMRC have such a stupid tax bands! Can you imagine if they did this with income tax, that extra £1 you earned would mean you pay an extra £5,000 tax. Yet this is just as ridiculous.

report this

Nigel Bradley

Jun 08, 2012 at 12:57

Michael - the reason we discourage this (unless the figures and items are absolutely clear) is that both sides (buyer and seller) can get drawn into the HMRC enquiries months after the purchase is completed leading to further costs and additional stress - and guess who would be blamed for "allowing" it to happen! - the lawyers.

report this

Michael Bailey

Jun 08, 2012 at 13:31

Nigel - with respect I don't think it is your 'job' to discourage as such. Clearly advisers should do just that, give clear advice including on all the risks and implications of such a course of action - but they should leave their client to make the decision. Any more than that and there is a risk of over stepping the mark, as in one recent case I saw where a knowledgeable purchaser was faced with blatantly misleading and disingenuous advice when he instructed his solicitor (on appointing them) to apportion £10,000 to carpets, curtains, oven, induction hob and other white goods, kitchen island, large shed, electric garage door and greenhouse etc etc all of which were less than 12 months old only to be told (later on) 'it wasn't possible'. When he queried why, he was told this was because the items were not valued as such in the estate agent's Agreed Terms of Sale Memorandum - even though most, if not all, were detailed in the sales particulars. When he queried it again he was told it was because the vendor needed to agree each item's valuation and was reluctant to do so, which I don't think is the case as all the vendor needs to do (at that point) is sign the contract with the consideration split/reduced appropriately. Finally his solicitor said it just wasn't worthwhile given the saving would only be £300 (there was no 'band shifting' involved here. All in all it was clear that the solicitors on both sides colluded to 'decide' what was going to happen and I don't think it was their job to give away £300 of their client's money - especially as realistically (in this case) there was no risk involved........

report this

Nigel Bradley

Jun 08, 2012 at 13:52

Michael

I can't comment on that case as I don't know all the facts - I would agree that both Vendor and Purchaser should agree the individual valuations. Both parties could suffer in the event that HMRC challenges the apportionment.

report this

jo soap

Jun 08, 2012 at 13:53

Surely instead of banding rates going up as the value of the house increases, they should go down. I mean, £140,000 given to the gov. for buying a 2 mill house. Even if i had that sort of money it would break my heart. I also as it happens, disagree with rising rates on income even though it is graduated.

It`s hard not to think of the government as The Enemy within.

report this

Jonathan

Jun 08, 2012 at 14:04

jo, People who spend £2 million plus on a house don't pay any stamp duty. They get an offshore company to buy the property then buy they buy the company. Hence no stamp duty is paid.

report this

jo soap

Jun 08, 2012 at 14:09

Phew ! Thanks for the tip !!

Thought the whole idea was to stop this though ?

report this

Chuck

Jun 08, 2012 at 14:53

Or... the seller can just reduce the price of the house and keep their furniture/white goods that they would have had to replace...

Adding chattels is just discounting price by adding other items into the deal. The benefit comes in trying to agressively price the chattels inline with the sellers expectations.

report this

Jill Henry

Jun 08, 2012 at 15:16

Islamic funding is another way to avoid as tax on property is prohibited.

report this

Anonymous 1 needed this 'off the record'

Jun 08, 2012 at 16:06

Jonathan - March 2012 budget introduced measures to put a stop to 'enveloping', charging 15% SDLT for any purchases by companies of high value (£2m +) residential properties. Further measures are also likely to be introduced in April 2013 to encourage 'de-enveloping' of £2m + residential properties which include a CGT charge for non-resident 'non-natural persons' and an annual tax charge for companies holding high value properties. There's currently a consultation being held by the Treasury to iron out the details...

Re the article this is fairly simple stuff, which any solicitor worth his salt should be able to deal with. Key is that a robust and fair valuation is required on chattels in which case HMRC will not have too much to get excited about...

report this

Clive B

Jun 08, 2012 at 23:01

Michael Bailey

"..he instructed his solicitor .. to apportion £10,000 to....kitchen island, large shed, electric garage door and greenhouse.."

I'd view all of those as fixtures and fittings. I've never heard of anybody taking their kitchen island, electric garage door etc with them when they move.

I'd expect HMRC to be on that as tax avoidance.

report this

Mark Lance

Jun 10, 2012 at 10:06

What a useless article, what's new here?

Next week they should do an article on did you know you can put a lower offer in then the asking price!!

report this

derek farman

Jun 10, 2012 at 14:38

The time it must take up arguing over what are chattels and what are not and the cost of resulting tribunals is both silly and expensive . Why on earth not have a simple sliding scale for calculating the tax .

report this

J Thomas

Jun 10, 2012 at 21:28

The Scottish Government are abolishing Stamp Duty in some 18 months and replacing it with a land value tax on purchases. There is to be a sliding scale of charges, nil up to £180,000, however the ludicrous cliff edge system is abolished. There are likely to be about five different bands on which you will only pay the percentage over each bands threshold, much like income tax. Also the tax will be levied on the actual lands location, and as you cannot move land there will be no avoiding tax by being registered overseas etc. The property cannot be owned by the seller until the tax is paid. It is estimated that property under £325,000 will be cheaper than stamp duty levy, property over £325,000 will be paying more with land value tax. perhaps the Treasury should also consider this?

report this

LouisV-W4

Jun 11, 2012 at 12:35

J Thomas... please tell me when the Scottish Government acquired such powers to vary the UK tax system? Is this 'Land' tax something the SNP has somehow managed to prise away from HMRC outside of the existing UK tax regime?

The Scotland Bill is just the starting point of the devolved tax discussion, and there are questions and no answers right now. For instance, who would be a Scottish taxpayer? If I had homes in England and Scotland, and I sell my Scottish home, I would ensure I pay SDLT based on whichever regime is more beneficial to me. Rather like MP's property expenses, I would 'flip' on a regular basis. How will the Scottish taxation department or HMRC decide who gets my dosh?

To think Scotland will have devolved taxation by next year sounds more like SNP rhetoric. The reality is it will probably take a decade or more to design and implement devolved taxation, if it ever happens. Scottish voters may well decide it's simply not worth the effort and cost!

report this

Kris

Aug 05, 2012 at 21:25

Is it possible to avoid falling into the 250,000 band by using chattels AND other means of 'giving' money to the seller?

For example offering to pay all of their legal fees or estate agent fees?

report this

Kris

Aug 05, 2012 at 21:31

Is it possible to avoid falling into the 250,000 band by using chattels AND other means of 'giving' money to the seller?

For example offering to pay all of their legal fees or estate agent fees?

report this

james davidson

Dec 19, 2012 at 18:27

2 million pound properties. Nobody pays any tax. I was watching a programme this week and alot of rich people not paying any tax since they

have the properties registered to offsure company. and the tax man is doing nothing about it....

report this

George Smith

Feb 14, 2014 at 16:28

On 2 December 2013 The Rt Hon Edward Davey MP announced :-

“In future, when people buy a new home, they could get up to £1000 from the Government to spend on important energy-saving measures – equivalent to half the stamp duty on the average house – or up to £4000 for particularly expensive measures. The scheme will be available to all people moving house including those who don’t pay stamp duty, helping around 60,000 homes a year, over three years.

1.Stamp duty rebate worth up to £1000, or up to £4,000 for particularly expensive measures, available to all people moving house including those who don’t pay stamp duty, helping around 60,000 homes a year over three years.”

Does anyone know if and when this stamp duty reduction will come into effect. How do I claim it when I move in about six weeks time?

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

Sponsored By:

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Latest from Investment Basics

Read more...

The Accumulator: what a year in markets!

by Gavin Lumsden on Dec 19, 2014 at 16:43

Sorry, this link is not
quite ready yet