Guidance for clients looking to benefit from the stamp duty reduction.
One of the key measures announced by the Chancellor in July was the reduction in Stamp Duty Land Tax (SDLT) on residential property. The purpose of the reduction is to boost the housing market and support the construction industry.
Accountants are often asked by their clients what they should do to get the full benefit of this and how they can increase their income. This is a valuable piece of advice that can guide your clients in taking an informed decision which is right for them in the long run.
What are the current SDLT rates?
| Property or lease premium or transfer value | SDLT rate
08/07/2020- 31/03/2021 |
| Up to £500,000 | Zero |
| The next £425,000 (the portion from £500,001 to £925,000) | 5% |
| The next £575,000 (the portion from £925,001 to £1.5 million) | 10% |
| The remaining amount (the portion above £1.5 million) | 12% |
The result of this SDLT holiday means those buying a property in England and Northern Ireland won’t pay any tax at all on purchases up to the £500,000 threshold – a saving of up to £15,000. Above £500,000 the normal rates apply, but you still make the saving on the first half a million. As the savings are quite substantial, there is enormous interest seen among first time buyers and landlords, which has boosted the housing market demand.
The governments of Scotland and Wales apply different tax rules, and people buying here will pay 0% only on the first £250,000.
You can use HMRC’s SDLT calculator to work out how much tax you’ll pay.
Does this change mean that this is the right time to buy an investment property?
As an investor, your clients may be thinking about starting or growing their property portfolio, especially when interest rates on savings are at an all-time low. If they have sufficient funds, this may be the right time to invest in property to generate an additional source of income. The SDLT holiday means that they will only have to pay the 3% surcharge when buying another buy-to-let property up to a value of £500,000.
However, if the client is a new landlord, you will need to advise them of the other responsibilities which they should be aware of as a landlord. Some of the key questions to consider asking your client may include:
- Do you want to keep the property until retirement or want to pass it on to your next generations?
- Have you factored these ongoing costs?
- Majority of the councils have withdrawn empty property council tax relief (unless it is uninhabitable), which means that you have to pay council tax from your own pocket for your empty property if the tenant has left.
- Regular repairs, landlord gas and electricity safety checks, insurance means there is less true margin left for you.
- From 6 April 2020 – mortgage interest is fully disallowed and replaced with a maximum of a 20% tax credit. Residential buy-to-let landlords are no longer able to deduct their finance costs from their property income to arrive at their taxable property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs. So, if you are already a higher rate taxpayer, you may need to think about an alternative structure ie buying a property in the company or buying in the name of your spouse or children.
- Are you going to manage the property yourself or engage an estate agent to handle all the paperwork involved?
- Do you have an alternative source of income to fund the above costs should your property become vacant?
- If you fail to perform your landlords’ responsibilities, there are hefty fines and convictions based on your careless behaviour towards the maintenance of the property.
- Rental property investment business is generally seen as a passive source of income unless otherwise proved. In the event of death, there is no relief available from inheritance tax, which could be obtained on a trading business (business property relief). This could result in 40% of your estate ending up with the treasury instead of your family.
The SDLT reduced rate provisions apply for a limited time up to 31 March 2021 and you may wish to alert your clients to take advantage of this measure. At the same time, it should be noted that the additional rate of SDLT applies in various situations that clients may not have fully appreciated, for example when buying a property jointly as a married or civil partnership couple, the rules apply to both individuals even if only one of them owns a previous property. In this case, the higher rate would apply meaning 3% SDLT on a property within the £500,000 purchase price.
Useful resources
ACCA technical factsheet: landlord reliefs and taxes
Guidance for landlords and tenants
This article has been shared from ACCA In Practice, to whom copyright belongs. Whitefield Tax are an ACCA Member Firm