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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
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|
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.’
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