When will the assumption of debt be chargeable consideration?
Chargeable Consideration, Joint Tenants, Release or Assumption of Debt
“1. Mummy and son own a BTL in equal shares. The Property is currently valued at approximately £300,000
2. The value of the existing mortgage with Lender 1 is approximately £167,000
3. Mummy will transfer her 50% share in the property to her son for nil consideration (gift) and son will simultaneously re-mortgage the Property in favour of a new Lender 2.
Given the above, in real terms the value of the gifted element will be our client’s 50% share of the Property (being £150,000) less 50% of the existing mortgage (being approximately £83,500), therefore making the total value of the gifted element as £66,500.
However, the existing debt, Lender 1, is classed as consideration. HMRC class the transaction as being an assumption of the outgoing party’s share of debt in the property (£83,500) by the transferee and therefore the redeemed charge is classed as an associated discharge. Whilst this figure is under the £125,000 threshold for SDLT, as the property is not the son’s main residence is he caught by the increased rate and does he have to pay 3% SDLT on the £83,500? Seems a little unfair to me, given that he has already paid stamp duty when he originally purchased the property. Is the transfer of equity considered a “purchase” for such purposes?”
Source: BLG Member
Yes the son will be liable for the 3% surcharge on the 50% share he acquires.
Where there is the release or assumption of a debt (or the transfer of a property subject to a debt) the debt can constitute chargeable consideration for SDLT purposes. The relevant provisions are in paragraph 8 of Schedule 4 FA 2003.
The basic rule is that where the consideration for a land transaction consists in whole or in part of:
1) the satisfaction or release of debt due to the purchaser or owed by the vendor (paragraph 8(1)(a)); or
2) the assumption of ‘existing debt’ by the purchaser (paragraph 8(1)(b)),
the amount of debt satisfied, released or assumed is taken to be the whole or, as the case may be, part of the chargeable consideration for the transaction.
Where:
1) debt is secured on the property immediately before and after the land transaction; and
2) the rights or liabilities of any party in relation to that debt are changed as a result of or in connection with the transaction,
there is taken to be an assumption of debt by the purchaser falling within paragraph 8(1)(b).
This is an anti-avoidance provision intended to prevent parties temporarily paying off secured debt before property is transferred and reinstating it immediately afterwards.
If there are two or more purchasers or vendors with undivided shares in the property the amount of secured debt treated as assumed is determined on the basis that the proportion of the amount owed by a person corresponds to the share that they own in the property subject to the debt. For this purpose joint tenants are treated as owning the property in equal shares.
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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