Can stamp duty be paid from equity?

Posted 21st July 2023 by ctatax-admin

Cornerstone Tax is the UK’s leading property tax advisers, specialising in Stamp Duty Land Tax. We’ve reclaimed over £15 million in overpaid SDLT in the last 12 months. Contact us for stamp duty advice, or to see if you are eligible to claim a refund from HMRC on overpaid Stamp Duty.

Introduction

Stamp Duty Land Tax (SDLT) is a tax imposed on property transactions in England and Northern Ireland. It is a significant expense that homebuyers have to consider when purchasing a property. One intriguing question that arises is whether it would be feasible for the SDLT to come out of equity rather than being an additional cost to the buyer. In this blog post, we will delve into the concept of SDLT, discuss the potential implications of shifting the tax burden, and examine the feasibility of such a proposal.

Understanding Stamp Duty Land Tax (SDLT)

SDLT is a tax imposed by the UK government on property transactions exceeding certain thresholds. The tax amount is calculated based on the purchase price of the property. The rates and thresholds vary depending on whether the property is residential or non-residential, and whether the buyer is a first-time buyer or an additional property owner. SDLT is typically paid by the buyer within 14 days of the completion of the transaction.

Read: Top stamp duty saving tips for landlords

The Argument for Shifting SDLT to Equity

Advocates of shifting SDLT to equity argue that it could make homeownership more accessible for buyers, particularly first-time buyers who often struggle to save enough money for a deposit and associated costs. By incorporating the SDLT into the overall cost of the property, buyers would have the option to include it in their mortgage, thus spreading the tax payment over the loan term.

Potential Implications

1. Immediate Financial Relief: Shifting SDLT to equity would relieve homebuyers of the burden of paying the tax upfront, enabling them to allocate their available funds to other essential expenses related to the property purchase, such as legal fees or home improvements.

2. Increased Affordability: Including SDLT in the mortgage would lower the initial cash outlay required from the buyer, potentially making homeownership more affordable for individuals who struggle to save a large deposit. This could be particularly beneficial for first-time buyers.

3. Long-Term Costs: While shifting SDLT to equity might provide immediate relief, it is important to consider the long-term financial implications. By incorporating the tax into the mortgage, buyers would ultimately pay interest on the SDLT amount over the loan term, potentially resulting in higher overall costs.

Feasibility and Challenges

While the concept of shifting SDLT to equity may seem appealing, several challenges need to be addressed to determine its feasibility:

1. Mortgage Lender Approval: For this proposal to work, mortgage lenders would need to be willing to incorporate SDLT into the loan amount. Lenders would have to assess the potential risks associated with this approach and adjust their lending criteria accordingly.

2. Loan-to-Value Ratio and Risk Assessment: Including SDLT in the mortgage could impact the loan-to-value (LTV) ratio, which measures the loan amount relative to the property value. Lenders would need to evaluate the impact on risk assessments and determine whether adjustments are necessary.

Read: How long does a stamp duty refund take?

3. Legal and Administrative Considerations: Implementing a system where SDLT is included in the mortgage would require legal and administrative changes. It would involve coordination between the government, lenders, and other stakeholders to ensure a smooth transition and proper record-keeping.

Conclusion

While the idea of shifting SDLT to equity has its merits, it is crucial to thoroughly assess its feasibility and potential consequences. While it could provide immediate financial relief and increase affordability, it may result in higher long-term costs due to interest on the SDLT amount. Mortgage lenders would need to evaluate the associated risks and adapt their lending practices accordingly. Furthermore, legal and administrative changes would be required to implement such a system. Ultimately, the question of whether SDLT can come out of equity involves a complex analysis of various factors, and careful consideration must be given to strike a balance between.

Cornerstone Tax is the UK’s leading property tax advisers, specialising in Stamp Duty Land Tax. We’ve reclaimed over £15 million in overpaid SDLT in the last 12 months. Contact us for stamp duty advice, or to see if you are eligible to claim a refund from HMRC on overpaid Stamp Duty.