Does the 3% SDLT surcharge apply to a transfer of equity?

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“My client has more than one property. She bought an investment property with her brother last year with a mortgage from the Halifax and now they want to do a transfer of equity.

There is a prima facie liability to SDLT and I have advised that the higher rate applies. I have copied and pasted my clients email below. She is quite anxious and if I am correct it is a financial deal breaker so to speak. Can anyone shed any light?

Client email:

I have tried to gain a bit more insight into the stamp duty point. It seems HMRC are still unravelling situations such as mine. I have been told that

‘There is one possible argument that the new rules might not apply (based on an uncertainty over whether a 50% interest in a property falls within the definition of a “major interest”) which has been questioned by some practitioners’.

Any views on ‘major interest’? My view would be that this property is held 50/50 so equal value.”

Source: BLG Member

 

A ‘major interest’ is defined in section 117(2) FA 2003 as follows:

‘In relation to land in England or Wales, …

(a) an estate in fee simple absolute, or

(b) a term of years absolute, whether subsisting at law or in equity.’

In SDLT Technical News No. 5 (August 2007) HMRC said:

‘Our view is that the definition is, as the wording suggests, intended to mirror the wording of LPA 1925 s 1(1).  The words “in equity” are intended to extend the scope of “major interest” to equitable interests which are equivalent to an estate capable of subsisting at law.’

There is a view that an undivided share is not a major interest for most  SDLT purposes (including  the 3% surcharge) as it is an interest in the equitable estate of beneficial co-owners and is not a legal estate.  In other words, the major interest is what is owned together, not the interest of each co-owner.  This conclusion is supported by the fact that in certain parts of the SDLT legislation, for  example, paragraph 6F(7)(b) of Schedule 4A, an undivided share in a major interest is expressly included as a major interest but not in Schedule 4ZA (the surcharge provisions) .  However this is not HMRC’s opinion (see Notes on page 26 of the Guidance Note on ‘Stamp duty land tax – Higher rates for purchases of additional residential properties’– November 2016).  I understand that the matter is to be put beyond doubt, possibly on Budget Day.  The safer course must be to assume that a co-ownership interest is caught by section 117(2)..

I am not sure who holds the legal estate in your case but if there is a bare trust the beneficiaries of that bare trust will be treated as holding the interest in the dwelling for the purposes of the additional rate.

On the assumption that your client is acquiring all or part of her brother’s interest, the safer conclusion is that she will be acquiring a major interest in the investment property from him and the additional rate could therefore apply if the other conditions are fulfilled.

At the time of publication this response was correct however as tax legislation and practice change from time-to-time you should take specific advice before taking any action.

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