Sell to company to avoid the 3% stamp duty land tax (SDLT) surcharge?

The issue

Since 1 April 2016 second houses have generally triggered a 3% SDLT surcharge and although we are in an SDLT ‘holiday’ (no SDLT up to £500,000) until 31 March 2021, this does not apply to the surcharge.

If a buyer has more than one house on midnight of the day of purchase, then the only real exemption from the surcharge is if the new house is a replacement for a main dwelling which was sold in the previous three years. Therefore, a purchaser can hold a rental property and avoid paying the surcharge on a replacement main dwelling, but the charge would apply for a rental property acquired in addition to an existing main dwelling.

Where an old main dwelling is sold within 3 years after the acquisition of the replacement main dwelling then it is possible for the purchaser to reclaim the 3% surcharge from HMRC.

We are often asked if purchasers can avoid the 3% surcharge by selling a property to a company. Although it is clear that an individual is not treated as owning properties held by his company, care needs to be taken here.

Using a company

Anybody who uses a company needs to be aware that SDLT is generally payable at market value by the acquiring company and that will include a 3% surcharge.

Example

Fred is about to buy a new main residence for £1M. He wants to let his existing property (which was his main residence) worth £500,000. If he does nothing (and keeps his existing property) he will end up paying a £30,000 surcharge on the £1M property and will not have scope to recover it unless he sells the new property within three years. On advice, he sells his old property to a company before completing on the new property. Although this triggers £15,000 of SDLT in the company, £30,000 of SDLT is saved on his new purchase. Furthermore, the £15,000 is a company liability and will ultimately come out of profits which otherwise would have been taxed on Fred as a dividend (therefore the effective cost is less than £15,000).

Forbes Dawson view

The use of a company to avoid the 3% surcharge should not be dismissed out of hand, although there are other tax consequences to consider such as capital gains tax. This will be particularly effective when a holding of a relatively low valued property threatens to trigger a 3% surcharge on a higher value property. Generally, this will only be an appropriate strategy if the property being sold to the company is only used by third parties as part of a rental business. Otherwise, there are likely to be all sorts of reasons why this would not be tax-efficient (benefit-in-kind, ATED and potential 15% SDLT charge to name a few). Subject to the various caveats this is well worth considering!

 

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