Can I avoid paying stamp duty? 2020 update.
The ever-increasing costs of buying a property may tempt some to consider stamp duty mitigation. Before you are tempted, you should know the risks involved.
What is stamp duty?
Stamp Duty Land Tax (SDLT) is a tax on property and land transactions. Anyone buying a residential property purchased for more £125,000 in England or Northern Ireland must pay stamp duty.
If you are buying for the first time and meet certain criteria, you will not have to pay stamp duty.
In Scotland you pay 'Land and Buildings Transaction Tax', and in 'Wales Land Transaction Tax'.
What is stamp duty mitigation?
Stamp duty mitigation is stamp duty avoidance.
A stamp duty mitigation scheme may reduce or eliminate the stamp duty you pay on a property, but such schemes are considered high risk. There are numerous specialist companies who will claim they can reduce your SDLT.
Inflating the value of fixtures and fittings
One common way to reduce stamp duty is to pay for the fixtures and fittings of your new home separately. This reduces the price of the property, which in turn reduces the amount of stamp duty you owe on it.
You should not be tempted to inflate the value of the fixtures and fittings, however.
If you claim the fixtures and fittings are worth more than their true value and HMRC investigates the transaction, you could face a penalty for a fraudulent attempt to avoid tax.
HMRC will scrutinise properties sold at or just below the next stamp duty bracket particularly.
Furthermore, since structural changes to stamp duty, there is minimal financial benefit in this strategy.
Stamp duty mitigation schemes
The methods used by a company offering stamp duty mitigation schemes can be complex.
These could include:
- Transferring the property to the buyer in multiple stages (or sub-sales) to avoid paying stamp duty on the full purchase price of the property.
- Transferring the property to a nominee company as an interim step in the transaction process, so as to benefit from lower SDLT rates.
The example of the nominee company works as follows:
The company pays just 85% of the purchase price initially (legislation stipulates that stamp duty is only chargeable on transfers of land ‘substantially performed’). The company then transfers the contract to the buyer, who pays the final 15% to complete the sale.
It is this 15% that is subject to stamp duty, rather than the entire purchase price.
The risks of stamp duty mitigation
If HMRC suspect stamp duty avoidance, they may investigate not only your property transaction, but your entire tax affairs.
HMRC may do this up to six years after your house purchase. If you are found to have bent the rules, you could face your full stamp duty bill plus a penalty of up to 100% of the tax owed on your property – plus interest.
This area of tax avoidance is more heavily policed by HMRC than ever..
Stamp duty mitigation could lead you to a long and expensive litigation process, resulting in you paying far more than the amount of stamp duty you originally owed.
Stamp duty mitigation is not a cheap option
The fees charged for a stamp duty mitigation scheme may be up to half of the tax saving you have made (plus VAT).
Once the fee is paid, the saving you make is unlikely to outweigh the risk.
- Any conveyancing solicitor who agrees to handle the transactions involved in stamp duty mitigation is likely to charge a higher fee, due to the risk and complexity involved.
- You may only be charged a fee if the stamp duty mitigation scheme is deemed ‘successful’. The criteria for success is often that HMRC have not investigated within 9 months. In reality however, HMRC have six years to investigate.
Your mortgage could be affected
If you need to obtain a mortgage and are using a stamp duty mitigation scheme, your conveyancing solicitor will have to disclose the scheme to your lender. Many mortgage lenders will not lend to anyone using a mitigation scheme.
In fact, most reputable conveyancing solicitors will not go anywhere near stamp duty mitigation either.
Stamp duty mitigation update - 2020
In 2018 HMRC won a landmark stamp duty mitigation case. As a result of the victory, HMRC has started pursuing people who used similar tax avoidance schemes.
As a result of the publicity and HMRC’s continued crackdown on stamp duty avoidance, stamp duty mitigation schemes are now rare.
Which properties are legitimately exempt from SDLT?
- A property transferred to you with no payment changing hands
- A property left to you in a will
- A property transferred as the result of divorce, or the breakup of a civil partnership
- Caravans, mobile homes and houseboats
- A property purchased for less than £40,000.