The Stamp Duty Surcharge – the importance of getting things in the right order

Recipients of personal injury lump sum awards often find themselves in the position of being able to race forward with meeting their short-term objectives which are clear in their minds, and obtain financial advice on the balance of the award after these initial transactions have completed.

In respect of a property purchase, I hope the following will illustrate the need for advice early in the process in order to avoid any unnecessary tax implications.

Mr P, a young adult wishes to purchase a property which he hopes will provide a suitable home for him, his fiancé and the family they wish to grow.

Presently, Mr P lives at home with his parents who are conscious of their mortgage commitments and wish to reconsider their options. The parents’ property is valued at approximately £200,000 on which there remains a £100,000 mortgage. Between Mr P and his parents, it is agreed that Mr P will repay the outstanding mortgage and his parents will pay a suitable sum in rent for the benefit of living in Mr P’s share of the property. As an investment, the terms are beneficial to both parties.

However, the parent’s mortgage is ready to be repaid now. Mr P has struggled to find a suitable property, and those that have been found have fallen through for various reasons.

Mr P is hoping to purchase a suitable property for circa £300,000. First Time Buyer Relief on a property of this value reduces the stamp duty liability from £5,000 to nil.

Had he not been advised, he would have repaid his parent’s mortgage in the first instance with two significant tax implications.

Firstly, as the part ownership of his parents’ property would not be his main residence he would not qualify for first-time buyers’ relief for Stamp Duty.

If only owning one property this would result in an unnecessary tax burden of £5,000; not insignificant.

However, the tax issue goes further as Mr P, on the purchase of his home would have needed to pay the second property surcharge to Stamp Duty and therefore he would face a tax liability of £14,000 rather than nil.

In ensuring that Mr P purchased his main residence prior to taking part ownership of his parents’ property, he will avoid any Stamp Duty in respect of his own home but instead face Stamp Duty of £3,000 in relation to the part ownership of his parent’s home.

In short, with effective planning Mr P has reduced his tax burden from £14,000 to just £3,000, the £11,000 being available to fund the far more pleasurable wedding in the summer rather than funding HMRC.