On 30 June the Telegraph announced that “Thousands of Divorce Settlements could be left open to appeal” because of the new Stamp Duty Land Tax surcharge. This was a somewhat exaggerated claim, given that the rate of the SDLT surcharge is three per cent of the purchase price of a property, but I take the point that this is a cost that many may not have factored into settlements. But what is this really all about?
In an effort to boost the Treasury’s coffers and to dampen down the ‘buy to let’ market, the Chancellor introduced this new tax in the 2016 budget. The Finance Bill is still proceeding through Parliament so changes may yet be made before it receives Royal Assent.
The proposal imposed an additional three per cent Stamp Duty Land Tax (SDLT) on the purchase of “additional” properties, with the basic rule being that if a “person” owned more than one property at the end of the day on which the relevant property was purchased they had to pay the additional three per cent SDLT. For SDLT purposes a married couple counts as one “person”, so if the husband owns the family home in his sole name and the wife then purchases a property in her own sole name – e.g. a holiday home or a buy to let – they will be caught by the new rules even though neither really owns more than one property at the end of the day of the purchase.
But what are the ramifications for divorcing couples?
The Telegraph highlighted one issue: what if a divorced spouse has no previous home to sell but already has a buy to let property (or received one as part of the settlement)?
Then he/ she would have to pay the three per cent surcharge. There is an exemption to the three per cent surcharge when a previous main residence is being replaced, or at least a refund of the three per cent surcharge is payable on a subsequent (within three years) disposal of the main residence.
In fact, and having read the bill and guidance notes, there is at least one further situation in which a spouse (say the wife) would have to pay the surcharge. As outlined above, a married couple is treated as a single unit for SDLT purposes, and that continues until the parties are separated by a court order or the divorce is finalised (by a court order). This is different to capital gains tax, where a couple are separate for tax purposes if they are in a situation where that separation is likely to become permanent. So, if a spouse purchases a new property before the divorce is finalised it appears that the three per cent surcharge will apply in all cases because there is no property being disposed of.
But can that three per cent surcharge be recovered as a replacement for a previous main residence and so fail condition D 117(3)(5) of the Finance Bill?
This is debatable. In a situation, say, where the husband retains the family home post-settlement, there is no sale, that home is jointly owned and the wife owns a rental property, then it could be argued that the wife is disposing of her interest in the family home at the time of settlement and therefore replacing her home. HMRC has indicated in the guidance notes that disposal does not need to be by way of a sale. Condition D is not satisfied and the three per cent surcharge is therefore either not due, or can be reclaimed. But, what if the circumstances are the same except that the Husband owns the family home in his sole name, with the wife having a single rental property? The key here is then what is meant by “disposal” at 117(3)(6)(b) of the Finance Bill, assuming that clause remains unchanged.
Does disposal include the wife ceasing to have a ‘deemed’ interest as part of a married couple for SDLT purposes?
At present this particular issue does not appear to have been addressed and contacting HMRC merely results in a referral to their website. Hardly helpful. I hope this issue will be addressed soon and that such disposals will qualify as a replacement of the main residence.
For the time being however, it is imperative for divorcing couples to be aware of the new rules, including any changes between now and the date the Act receives Royal Assent, because they do need to be considered as part of settlement discussions, or indeed on transfer of assets between-parties, in order to make use of the capital gains tax exemptions available for transfers in the tax year of separation.