The 3% SDLT surcharge – a trap for the unwary

The issue

With an ageing population, families are increasingly looking to ‘granny flats’ as a way of caring for parents in old age.  Last week we spoke about how acquiring a property with a granny flat could in fact offer a potential SDLT saving (see here).  This week we explain how a very similar situation could result in an SDLT nightmare.



Janet and John are a husband and wife with a house worth £1 million with a £500,000 mortgage.  The property is solely in John’s name, but they also own a small cottage in Cornwall in joint names.  Janet’s mother has had a bad fall and they decide to build a granny flat on the side of their house for her to live in.  They decide to raise £100,000 to fund the extension by re-mortgaging the house.  However, the bank insists that Janet is put on the mortgage.


SDLT position

Most advisers will be aware that assuming a mortgage liability counts as consideration for SDLT purposes.  However, Janet is willing to accept the SDLT cost, which at £250,000 (being half the existing liability) is calculated as follows:


SDLT band Rate SDLT (£)
First £125,000 0% 0
125,001-250,000 2% 2,500
TOTAL 2,500


In computing the SDLT, the solicitor believed that, although Janet owned another property, she wouldn’t be liable to the new 3% SDLT surcharge applying to individuals owning more than one residential property because he knew that there was an exemption for acquisitions of a main residence.

Unfortunately, a closer inspection of the rules proves that this is incorrect.  The exact wording of the legislation is that for the surcharge not to apply the transaction must involve “the replacement of the buyer’s only or main residence” and in this case there is no replacement.  Accordingly, 3% should have been applied to the entire £250,000, resulting in a liability of £10,000!

We believe that this is an unintended consequence of the legislation, and would hope that steps will be taken to amend the rules in a future Finance Act.  However, until then, any couples looking to release equity on their property in order to finance home improvements or other expenditure should take care to ensure that this doesn’t create an SDLT headache.  The bank may agree to an alternative arrangement e.g. lending on another asset, which could avoid the issue.



Post script:

Following on from the above Tax Bite, Michael Adie from Adie Pepperdine has been in touch to set out a way around this particular problem.


The Issue
Janet and John, a husband and wife, own a house worth £1 million with a £500,000 mortgage.  The property is in John’s sole name, but they also own a small cottage in Cornwall in joint names.
Janet and John want to build a granny flat for Janet’s mother to live in. They need to raise £100,000 to fund the extension by re-mortgaging the house.  The bank insist that Janet is put on the mortgage.


SDLT Position
Most advisers will be aware that assuming a mortgage debt counts as consideration for SDLT purposes.  The issue in this case is that because Janet is on the deeds of a second property, and this transaction doesn’t count as a replacement of main residence, the widely held view is that on assuming half the mortgage debt, Janet will be subject to stamp duty land tax and the new 3% SDLT surcharge.


When purchasing property in England and Wales, whilst the legal estate will always be owned as “joint tenants”, the parties to the transaction may choose whether to own the beneficial interest as joint tenants or tenants in common.
Joint tenants own the whole property.  If they split up, they share the sale proceeds equally.  If one dies, the other inherits, irrespective of any will (known as the right of survivorship).
Tenants in common own separate divisible shares in the property and must specify their shares or refer to a separate Trust Deed setting out the shares.  This method of ownership is used when there is a desire to keep the shares in the property separate, eg, uneven contributions, couples with children from previous relationships, and business partners.  A tenant in common may leave their share by Will, and if they die without a valid will, the property passes under the rules of intestacy.
What Janet and John need to do to avoid the SDLT surcharge is to transfer the property into joint names as tenants in common with Janet’s share being equivalent to 7.8% of the property (or any percentage which will be equivalent to a value of less than £40,000 when applied to the £500,000 mortgage).
As the chargeable consideration (including assumption of mortgage debt) would then be less than £40,000, no SDLT Return is required and no duty is payable.
A mortgagee would only require Janet on the mortgage to have the benefit of her covenant.  Mortgagees do not concern themselves with beneficial ownership.
In the future, further shares in the beneficial ownership could be transferred (simply by a Declaration of Trust) though again Janet and John may wish to ensure that the value of each transfer was below the chargeable limit.
As a final point, the same SDLT rules apply whether the transfer takes place by a Land Registry Transfer Deed or by a Deed of Trust.  People often assume (incorrectly) that a Declaration of Trust does not give rise to the need to complete an SDLT Return.




Sign up for our newsletter

Interested in receiving the latest tax planning ideas?

Sign up to Tax Bites – our weekly update offering practical but effective tax saving tips.

Contact Us

You can use this form to request us to give you a call or if you prefer just leave us a message. Please be sure to leave us a contact number or email address for you and we will get back to you as soon as we can.

0161 927 9277


Fairbank House
Ashley Road
WA14 2DP