The new Stamp Duty Land Tax (SDLT) regime has sent ripples through the residential property market for first-time buyers, second home buyers, and those who inherit property.
Acquiring a second residential property has become more complicated, and usually more costly, under the new regime. Buying a £1m second home before 26 November 2015 triggered SDLT of £43,750; on that date the bill jumped to £73,750 (a rise of 60%). If the new home replaces a main residence that is sold within 36 months, the 3% tax surcharge can be refunded.
If you are a first-time buyer (FTB), a complete exemption on properties up to £300,000, and lower rates up to £500,000, apply on deals sealed after 22 November 2017.
So far so clear. But what if you are the beneficiary of a trust or Will, or a trustee, or a parent buying for children? Can this interfere with FTB relief? Can a second property ever not be a second property?
Implications for inherited property
If a client who has never bought a home inherits a freehold or leasehold interest in a dwelling, sells it, and buys a more suitable home with the proceeds, this is no longer a first-time buyer transaction and there is no relief.
The same rule applies if the client already owns an inherited property when he buys for the first time – no relief.
Even if their existing interest in a property is only beneficial (or 'equitable'), they are still ineligible for FTB relief when making their first purchase.
However, where a trustee has previously bought a dwelling, but is not a beneficiary of the trust and meets the other conditions, they can get the relief.
Buying property for children
There are implications for parents intending to buy a house or flat for student offspring. The student would not lose their FTB relief when buying a future home, providing they had not been the owner or co-owner of a property bought for them by their parents.
However, the parents would then be buying a second home subject to the SDLT surcharge (and potential capital gains tax on disposal).
Tax partner Anthony Nixon says: "Parents who might think of giving a share of a family property, such as a holiday home, to an adult child who has not yet bought their first home should be aware."
He observes that there are "some important nuances" in the higher rate for additional dwellings (HRAD) legislation now enacted, which do not appear in the new rules on FTB relief.
For instance, although HMRC says that FTB relief is wiped out by any beneficial interest in a dwelling, the HRAD provisions exclude interests worth less than £40,000 and leases under 21 years. There does not appear to be a similar “de-minimis” provision on FTB relief.
HMRC says inheriting property denies relief, but it does not clarify when ownership is deemed to occur. Nixon says: "The normal legal rule is that you don’t inherit until the property is appropriated or assented to you. We must wait for more guidance from HMRC as to whether they agree with this.”
He says the HRAD rules have another valuable provision. "You can inherit up to 50% of an estate and the property doesn’t count as a second property for three years, so long as you don’t acquire the extra 50% and neither does your spouse or civil partner. Without such provisions in FTB relief, and clarification from HMRC, you could have a 1% share of an estate that includes a residential property and be denied FTB relief from the date of death."
Finally Nixon notes that bare trusts can preserve FTB relief but not interest in possession (IP) trusts. IP trustees could escape the HR charge when buying a property for an income beneficiary, including replacing a main residence.
He says: "If a trust beneficiary is planning to buy a first-time home, we can advise on what options there are, but they are likely to be limited."
Published: 18 January 2018
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