Most prospective new home owners who are in a position to purchase property for more than £125,000.00 will know that the single largest expenditure they will incur is Stamp Duty Land Tax.
For some home buyers there is therefore a temptation to try and reduce the extent of the tax. One of the main Stamp Duty avoidance tricks is to try paying for fixtures and fittings separately. In so doing however extreme caution should be exercised as the transaction could be challenged by HM Revenue and Customs who are keen to get their hands on all of the monies that the Revenue is entitled to!
How Much is Stamp Duty?
Stamp Duty is imposed upon the sale value of a property and is payable by the buyer. The tax is payable at the following rates:-
£125,001-£250,000 = 1%
£250,001-£500,000 = 3%
£500,001-£1,000,000 = 4% £100,000,001-£2,000,000 = 5%
Over £2,000,000 = 7% For prospective lottery winners who are buying for over £2,000,000 and purchasing as a company this 7% rate is increased to an eye watering 15%.
Why Does Stamp Duty Avoidance Occur?
Issues often arise where a property is changing hands at a price that just exceeds one of the threshold figures and particularly at the amounts of £250,000 and £500,000.
Buyers are sometimes given Stamp Duty avoidance advice in these situations that may on the face of it seem attractive (i.e. to keep the transaction in the lower tax band) but which could subsequently result in a large deferred tax bill. Furthermore, HMRC are at liberty to charge interest and penalties in addition to any outstanding tax.
The Government Are Addressing the Issue
In view of the Government’s desire to ensure that all tax that is due on property transactions is paid, HMRC have been taking a more robust stance of late and are investigating transactions around the threshold figures.
In particular there has recently been a decision in the case of “Orsman v HMRC” which has resulted in the purchaser paying an additional £5024 of tax two years after the purchase took place. This is on top of the original payment of £2500.
In that case the purchaser paid a total of £258,000 for the property and apportioned this £250,000.00 to the home and £8,000 for chattels including £800.00 for fitted units in the garage.
As the purchase price for the property did not exceed £250,000.00 this meant Stamp Duty of £2,500.00. However HMRC challenged the transaction successfully and it was subsequently determined that at least part of the £8,000.00 was for fixtures rather than chattels and that accordingly SDLT was payable at the rate of 3%.
Leaving aside the additional tax burden, the purchaser of the property had the expense and inconvenience of dealing with the investigation.
When asked to comment in a recent article in Welsh Homes Magazine, Mark Hobbs, a Senior Partner at Howells Solicitors, said that “hardly a week goes by without the parties involved in a transaction putting forward a scenario such as this. Very often it will be proposed by an inexperienced Mortgage Advisor or Selling Agent”.
According to Mark, if one payment is to be made for the property and another for contents HMRC creates a distinction between chattels for which a separate payment can be made, as opposed to fixtures which are items that are attached to the land and which to all intents and purposes form part of the property. Chattels can often comprise:
• Curtains and Blinds
• Free Standing Furniture
• Kitchen White Goods
• Light Shades and Fittings
The items that specifically would not normally be regarded as chattels include:
• Fitted Kitchen Units
• Agas and wall mounted ovens
• Fitted Bathroom Sanitary Wear
• Central Heating Systems
• Intruder Alarm Systems.
HMRC do not provide a comprehensive list of items and each case is considered on its own merits. Mark’s advice to anyone who finds themselves in this situation is to discuss it at the earliest possible opportunity with their conveyancing solicitor. It is advisable to consider using a firm that specialises in such matters and has the Law Society’s CQS (Conveyancing Quality Scheme) kite mark.
Let Howells Help
Mark and the rest of the team at Howells Solicitors meet this criteria and are more than happy to discuss any stamp duty avoidance plans you have.