Stamp duty changes in the Budget make income-shifting tax planning easier for married couples investing in property.
The old rules blocked saving income tax for married couples and civil partners by making the cost of switching ownership in mortgaged property too expensive.
Income shifting is a tried and tested strategy for couples where one is a higher rate taxpayer (40% or more) and the other is a lower rate taxpayer (20% or less). The aim is to transfer as much of the property profits charged at 40% tax or more to the other spouse.
Increasing or decreasing ownership shares in a property does this – and the new rule eases the costs.
Until April 5, 2011, stamp duty is calculated on the aggregate value of any transfers, including linked transfers over a period of time.
Stamp Duty is charged at the appropriate rate on the total value of all the property transfers.
From April 6, the rules are relaxed and Stamp Duty is calculated on the average value of a property transfer at a minimum of 1%.
The assumption is that if average property values come to less than £125,000 – the current Stamp Duty minimum threshold – any equity switch is still charged at 1%. Publication of formal guidance after April 6 should clear up the issue.
For a couple with £35,000 of rental profits split 50:50, the high rate taxpayer (40%) pays £7,000 tax on a £17,500 share of the rents at 40% while the other partner pays £3,500 tax on their £17,500 of rents.
If the couple can switch most of the rents to the lower rate taxpayer, they can save up to £3,500 in tax a year.
Switching a total value of £475,00 for five properties is charged at 3% or £14,250 today – but from April 6, is expected to fall to around £4,750 on the new calculation.
The aim of the change is to attract institutional investors in to purchasing buy to let properties, but the knock-on effect lets thousands of married landlords switch their assets to save income tax.
The move also affects capital gains tax, because couples can switch their shares in equity before a sale to save CGT at the highest rate as well.
