The Upad Landlord: Beware the new love tax - Additional Stamp Duty payable on any remortgage
What is the new "love tax"?
Couples who each own a bachelor pad, marry and decide to live in one and keep the other as a rental investment are being warned they could have to pay what is being dubbed a “love tax”.
According to an article in the Financial Times, they might have to pay the additional 3% Stamp Duty Land Tax (SDLT), which was introduced for second properties in April, if they need to re-mortgage their home.
This is because many mortgage lenders insist that couples take out a joint mortgage, so the spouse who owns the property will have to transfer half to their husband or wife, who will then also take on half the mortgage debt. Oddly, it’s this transfer of the debt that could trigger the additional SDLT charge as the spouse is then acquiring interest in a second property.
In what circumstances will the "love tax" be applied?
If the article is correct in its assumptions, the additional Stamp Duty would be payable on any re-mortgage of more than £80,000 and it would be due on half the total of the loan. So, couples are being taxed not on the value of their home but on their level of debt.
If the re-mortgage is for more than £125,000, the threshold for the standard rate of Stamp Duty, this would have to be paid on top of the additional rate of 3%.
As if things couldn’t get any stranger, it seems that HMRC itself isn’t quite sure if this is correct or not. It appears to suggest that couples will need to rely on their conveyancer to decide whether the additional Stamp Duty is applicable.
However, it warns that if SDLT isn’t paid when it ought to be, the spouse would be charged the full amount plus interest. Not terribly helpful, is it?
How can it be avoided?
The only way to avoid the additional Stamp Duty for sure is to find a mortgage lender who doesn’t require couples to take out a joint mortgage. Unfortunately, these tend to charge higher interest rates but, as Ray Boulger of mortgage brokers John Charcol points out, this might be cheaper than paying the additional SDLT.
Of course, the other option is for couples to sell their rental property prior to re-mortgaging their main home so they would then each own only one property, but then they would lose the rental income and any potential long-term capital growth. They’d need to do the maths to work out whether this is a sensible option.
This potential “love tax” isn’t the only anomaly of the new Stamp Duty rules. As main homes are exempt from the additional SDLT charge, someone can own several rental properties and/or holiday houses but won’t have to pay the additional SDLT when they sell their main home and buy another, but a landlord who buys a rental propertybefore buying a place of their own to live in will have to pay the additional SDLT on their home unless they sell their Buy To Let.
As always, it’s best to seek advice from a professional before you invest in Buy To Let to make sure you don’t pay tax which might be avoided with the right planning.