FAQs on Stamp Duty Land Tax following Flat Conversion Title Splits
In our first blog of this series, ‘The title split of your property and creating new leases‘ we discussed the practical and legal implications associated with splitting the legal title of your property and creating new leases. As discussed in that article, the law stipulates that the freeholder and any leaseholder of a property must be separate entities., i.e. a lease cannot be granted to oneself. Accordingly, many advisers recommend the title being split using a limited company, so that the freehold and leasehold interest are effectively held by different entities. Read more about the conveyancing process in transferring property into limited companies in our blog: Transferring a Property to a Limited Company.
However, the Stamp Duty Land Tax (SDLT) implications associated with such transactions can often be overlooked – and can have a very costly impact if not dealt with properly. In this article we look at two case studies where, in both cases, the clients saved over £100,000 in stamp duty. This is followed by some very useful FAQs setting out the Stamp Duty Land Tax (SDLT) implications associated with such transactions, along with the potential pitfalls and planning opportunities.
Can you rely on the HMRC Online Stamp Duty Land Tax calculator when dealing with flat conversion transactions?
The HMRC Online Stamp Duty Land Tax calculator is designed to assist with the calculation of Stamp Duty Land Tax in basic scenarios. It should not be seen as a ruling by HMRC on the correct Stamp Duty Land Tax payable and importantly does not take into account any reliefs that may be available to reduce the Stamp Duty Land Tax.
Flat Conversion Case Study
Starck Uberoi Solicitors clients, Mr & Mrs X own a freehold property which has recently been converted into three flats. The market value of the freehold is estimated at £900,000 with an outstanding mortgage of circa £330,000. Following advice from a third party, they had planned to transfer the freehold to a limited company (in which they would be directors and hold 100% of the shares), which would subsequently grant 3 long leases back to the couple’s limited company. Had the couple implemented this plan, without taking any action to ensure that specific reliefs were claimed on the SDLT return, the SDLT payable would have amounted to £124,000. However, after receiving expert advice, we were able to reduce the SDLT in this case to £42,000. Moreover, as part of a detailed review of the circumstances (specifically as it involved transactions between husband and wife), we were able to offer an alternative solution to the splitting of the title that reduced the SDLT to £780.
Removal of Multiple Dwellings Relief
Multiple Dwellings Relief (MDR) was a relief in the Stamp Duty Land Tax (SDLT) regime that was introduced in 2011. It was designed to reduce the amount of SDLT paid when buying two or more residential properties in the same transaction. As of 1st June 2024, this relief has been removed and is no longer available.
Other Potential Reliefs Available
Despite the removal of MDR, there are still some other potential reliefs that you should be aware of as these could possibly benefit you. In regard to a title split, you may be entitled to a Sale and Leaseback relief. This is when a company sells a property and then leases that same property back from the purchaser. Essentially, the seller becomes the lessee and the buyer becomes the lessor. By doing this, you can mitigate Stamp Duty Land Tax and CGT. But, be aware that there are various legal hurdles that need to be satisfied and you must seek proper advice before utilising this relief.
Another possible relief available is group company relief. This sort of relief arises in situations where you have one company with its subsidiaries. An example would be where a company transfers a property to another company. These two companies are subsidiaries and are owned by the same parent company. In this case, where both companies are owned by the same parent company or have the same shareholders, a group company relief can be claimed.
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FAQs on Flat Conversions and Stamp Duty Land Tax
Our solicitors and mortgage advisors receive numerous enquiries in relation to converting property into flats together with land registry title split, more of which you can read about in our previous blog ‘The title split of your property and creating new leases‘. A common theme is a lack of understanding of the complex nature of SDLT and capital gains tax rules.
Generally, a re-mortgage will not require SDLT to be payable because it is not a land transaction but the granting of new leases is a land transaction for SDLT purposes and SDLT may be payable. The amount of SDLT payable will be dependent on who the leases are granted to, i.e. an individual or a limited company, the value of the properties and the quantum of debt. It is possible to split the title and re-mortgage at the same time rather than suffer the delay of having to wait for the land registry to register the separate leases and then being told by the new lender that the re-mortgages can only be completed 6 months after registration. I have found that Starck Uberoi Wealth have the experience in finding clients the right mortgage in these types of situations.
SDLT will be payable on the price paid for the property. On the basis that the property has yet to be converted into 4 flats, no claim for MDR could be made on the initial purchase. If you subsequently convert the property to flats and grant the leases to a limited company, a further charge to SDLT will arise on the market value of the leases (regardless if no money is paid). However, there might be some reliefs that would be available to reduce the SDLT payable. There may also be CGT implications associated with this option. The SDLT exposure could be reduced by granting the leases in your sole names (e.g. 2 flats in father’s name and 2 in son’s name) or to other individuals.
Land transactions are exempt if there is no chargeable consideration. On the basis that your wife would not pay for the new leases, there would be no chargeable consideration and therefore no Stamp Duty Land Tax implications. This would not be the case if there was a mortgage on the property, as the assumption of debt by your wife would be treated as chargeable consideration for SDLT purposes (although the 3% surcharge does not apply in transactions between spouses/civil partners). Transactions between husband and wife/civil partners are treated as occurring at Nil Gain/Nil Loss for capital gains tax purposes. Therefore, no CGT would be payable on this transaction. Transactions between other connected persons are treated as occurring at market value and therefore CGT could be payable if there is a gain attaching to the property in transactions which are not between spouses/civil partners.
SDLT is generally only payable where there is chargeable consideration. However, special rules apply in relation to the satisfaction, release or assumption of debt. Consideration of the treatment of the existing mortgage of £500,000 will be required. Leases cannot be granted to oneself, therefore consideration of who the leaseholder should be will be required and the SDLT analysis will be different depending if it is an individual or limited company. It is important to note that if the ‘purchaser’ is a company, the chargeable consideration will be deemed to be the market value, regardless that no money is exchanged or the value of the debt. The 3% surcharge provisions are likely to be applied.
SDLT of £30,000 will be payable on the purchase of the freehold. If leases are subsequently granted, there could be further SDLT to be paid (in addition to the above). If they are granted to a limited company, SDLT will be payable on the market value of the leases. If granted to an individual, there will only be SDLT if there is chargeable consideration. The release of the mortgage will constitute chargeable consideration for these purposes. Alternatively, if you can convince the seller to issue three long leases directly to you rather than sell as one freehold unit, SDLT would be payable on the aggregate value of the leases (as they would be treated as linked). The benefit to this approach is there will be no double charge. In this case, as the majority of the value would be stripped from the freehold, the freehold title could be transferred to a limited company simultaneously with minimal SDLT implications. Transactions between other connected persons are treated as occurring at market value and therefore CGT will be payable if there is a gain attaching to the property.
How Starck Uberoi can Help
Starck Uberoi have a dedicated team of solicitors that specialise in creating new leases for flat conversions following a property title split. We offer an end-to-end service by also advising on stamp duty reductions and specialist mortgage advice where multiple leases are granted. You can contact us on 020 8038 5354 or at solicitor@starckuberoi.co.uk.
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