Stamp Duty - Watch out for linked transaction tax trap

Despite Chancellor George Osborne?s recent overhaul of stamp duty, the linked transaction tax trap is still there for property investors.

Linked transactions are basically when HM Revenue & Customs (HMRC) decides to treat a series of property deals as a single purchase and charges stamp duty on the total price rather than on each transaction.

For instance, if a husband and wife bought a large house and garden and separated the deal by the investor wife buying the house for £250,000 and the developer husband buying part of the garden for another £250,000, the stamp duty bill is not what you think.

Instead of paying £2,500 on each purchase, they would pay £15,000 because the transactions are linked because under tax rules they are connected people.

The same problem applies to investors buying property portfolios, because the same buyer and seller are involved or investors buying two or more off plan homes on a new development ' again the same buyer and seller are involved.

Using a company or asking relatives to help out to cut the tax bill doesn?t work either, because in most cases they will be connected persons.

Another linked transaction stamp duty tax trap is buying a mixed portfolio of residential and commercial property.

In this case, stamp duty is charged at non-residential rates ' which did not change in December?s revamp of the rules ' not the new residential rates.

A quirk of the system is non-residential rates are cheaper than the new residential rates ' a commercial property valued at £500,000 attracts a 4% stamp duty charge, but homes valued at more than a million have 5% and 7% thresholds.

Other rules apply to property purchases with deferred payments, stage payments or values based on future events, such as rent or turnover achieved.

The point to remember for property investors is look at the ownership and seller relationships before committing to a purchase and look for the mix that offers the best long-term tax advantages.

... LandlordZONE.

Article courtesy of LandlordZONE
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