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How to avoid stamp duty on second home

13/03/2020

Get a loan agreement to avoid second home stamp duty

Our solicitor can help draft a loan agreement for a Joint Mortgage Sole Proprietor arrangement. The loan agreement takes 24 hours to draft and can include interest terms and when to repay.



How to avoid stamp duty on second home
How to avoid stamp duty on second home
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Since the 1st April 2016 there is an additional rate of stamp duty payable if you are purchasing a property and own an interest in another property anywhere around the world (not just the UK). We often get asked "How to avoid stamp duty on second home" especially when the buyer is using a Joint Mortgage Sole Proprietor Mortgage. In this article we'll provide ways to legitimately avoid paying stamp duty on second home, to help the buyer fund the purchase and to receive your money back.

When do you pay Stamp Duty Land Tax?

If any party acquires an interest or a greater interest in land, stamp duty land tax (SDLT) or land transaction tax (LTT) will be payable by reference to any chargeable consideration given for it. Chargeable consideration is defined in the Finance Act 2003, Schedule 4, Stamp duty land tax: chargeable consideration and confirmed by HMRC with examples here https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm04040.

When do you pay second home stamp duty?

If any of the parties purchasing a property own an interest in any other property around the world then an additional 3% SDLT is payable on top of the normal rate. You don't have to pay it if you're just selling your main residence and buying a new main residence. There are additional complications if you are married because it doesn't matter if you haven't got an interest, if your partner does then you still have to pay the higher rate - SDLT - higher rates for additional dwellings: purchasers with a spouse or civil partner


How to avoid stamp duty on second home with a loan?

As we have seen above, if you have an interest in the property, whether at the start, during or at the end, then you will have to pay the second home stamp duty. To understand what you need to do, we must first understand what is an interest.

A chargeable interest is defined very broadly in the Finance Act 2003 Section 48 as:

    1
    In this Part “chargeable interest” means—
(a)an estate, interest, right or power in or over land in England, or
(b)the benefit of an obligation, restriction or condition affecting the value of any such estate, interest, right or power,other than an exempt interest.

It goes on to confirm what isn't classed as a chargeable interest:

    2
    The following are exempt interests—
(a)any security interest;
(b)a licence to use or occupy land;

3
In subsection (2)—
(a)“security interest” means an interest or right (other than a rent charge) held for the purpose of securing the payment of money or the performance of any other obligation;

This would mean that a loan can be given and repaid and it does not give rise to an interest in land and as such you can avoid stamp duty on second home.
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    Frequently Asked Questions

    Examples of second home stamp duty

    Example 1 - Married with 2 separate properties
    Andrew and Jayne, a married couple, each own a residential property, with neither having any interest in the other’s property. They both live in the property owned by Jayne: the property owned by Andrew is rented out. Jayne is selling her property and they are jointly purchasing a new one, which will be their new main residence. Andrew will retain his rented out property.

    The higher rates will not apply to the joint purchase by Andrew and Jayne of a new main residence. As they are married and have both lived in the property owned by Jayne as their main residence they will both be treated as replacing their main residence.

    Example 2 - Unmarried with 2 separate properties
    Alyson and James, who are not married to one another, each own a residential property, with neither having any interest in the other’s property. They both live in the property owned by Alyson: the property owned by James is rented out. Alyson is selling her property and they are jointly purchasing a new one, which will be their new main residence. James will retain his rented out property.

    The higher rates will apply to the joint purchase of a new main residence by Alyson and James. As they are not married (or in a civil partnership) James will not be treated as replacing his main residence as, even though he has been living in the property owned by Alyson, he has no interest in the property Alyson is selling.


    What interest rate can the loan have?
    Knowing you can get your money back through the repayment of the loan from the person who owns the property, normally a family member, you need to decide if you want to get repaid any interest on top. This is what you need to consider:

      1
      Inflation related - this is inline with inflation and no profit is made.
      2
      Higher than inflation - this means you are looking to make a profit from the transaction and the loan agreement will fall under the Consumer Credit Act 1974. This type of loan agreement costs more and the borrower will need to seek independent advice on the terms of the loan before agreeing to it.

    Is the loan registered over the property?
    Having the loan secured over the property as a second charge gives the lender security that when the property sells, their loan will be settled after the first charge with the mortgage lender has been settled. The loan can be unsecured, however there is a risk then that the property could be sold without the loan being settled. The lender can still enforce the terms of the loan, however this is why it is so important there is a robust legally binding Loan Agreement drafted.

    Will the mortgage lender allow the loan?
    Every mortgage lender is different and their decision as to whether they agree to a loan will be handled on a case by case basis. Most mortgage lenders will agree to a loan as long as they have a first charge over the property.

    There is nothing wrong with tax structuring

    You must pay tax if it is due, however if there is no tax to pay because of the way you have structured the transaction then this is ok. You should always speak to a tax adviser to help show you (if you can) or How to avoid stamp duty on second home. If you need to speak to a tax adviser then get in contact.
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