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Inter-Spouse Transfers And The Exception That Proves The Rule
By Alan Pink, January 2018
Alan Pink considers a stamp duty land tax ‘trap’ when transferring properties between spouses and other family members, and suggests evasive action.

It’s pretty generally understood that husband and wife (and civil partners) are treated in most ways as a single unit for the purpose of taxing asset transfers of any kind. 

Inter-spouse transfers
In the case of capital gains tax (CGT), for example, there’s a specific rule which says that, all the time the spouses/civil partners are living together – that is, all the time they are not separated in circumstances such that the separation is likely to be permanent – any transfers of assets subject to CGT are treated as if they had taken place at such a value as gives rise to neither a gain nor a loss. This applies whatever the actual consideration, or lack of consideration, there may be for the transfer in real life. 

This can obviously be a very useful rule if there are tax-related, or non-tax related, reasons why you would want the ownership of the assets to be different. For example, if spouse A is a higher rate income taxpayer, but spouse B is a basic rate taxpayer or even a non-taxpayer, it can make a lot of sense in terms of income tax planning to transfer an income producing asset, such as an investment, to spouse B. This can take place without the operation of the usual rule which applies to transfers of assets between persons other than at arm’s length. Under this usual rule, any such transfer is treated for CGT purposes as if it were a sale of the asset concerned for its current market value. Not so between spouses. (The rules relating to land and buildings transaction tax in Scotland are for practical purposes identical).

Similarly, transfers between spouses (with a limited exception where the transferee is non-UK domiciled) are exempt from inheritance tax (IHT). So, any asset, of whatever value, can be transferred between spouses or civil partners and there’s no IHT on that transfer, even if the transferor spouse doesn’t manage to survive the gift by the usually necessary seven years. 

Transfers and SDLT
Generally speaking, you could be forgiven for assuming that the taxman just isn’t interested in inter-spouse/civil partner transfers. However, there’s one specific exception to this which often applies in practice, and this is the position with regards to stamp duty land tax (SDLT). A search of the relevant provisions (contained in Finance Act 2003, which introduced SDLT) fails to uncover any special treatment applied to transfers of UK land between spouses. 

However, there is a peculiarity about SDLT, as compared with the other taxes we’ve mentioned, which is that transfers of land and buildings in the UK between individuals are not generally subject to the rule which substitutes market value for the actual consideration. So, a genuine gift between two persons, that is a transfer where there is genuinely no direct or indirect contractual ‘consideration’ for the transfer, is something which the SDLT rules take, as it were, at ‘face value’. 

Therefore, if it is a pure gift, with nothing passing from the transferee to the transferor in return, the value for SDLT purposes is precisely that: nothing. If the transferee pays something for the transfer of the land and/or buildings, the value of the transaction for SDLT is the amount he actually pays; not any deemed valuation of the transfer (note that we are talking about transfers between individuals here; there is a special rule applying to transfers to limited companies).

Taking over debt
However, note a very important proviso, or rather an elaboration, of this rule. The best way to highlight this pitfall in the SDLT rules is by taking an example.


Example 1: Transfer of mortgaged property

Mr Brown owns a buy-to-let property worth £500,000, on which there is a £200,000 mortgage. The rent payable by the tenants is, of course, taxable on Mr Brown as his income. Since he is a highly paid executive, the rent is, therefore, effectively bearing 45% tax as the ‘top slice’ of Mr Brown’s income. Mrs Brown, on the other hand, is a part-time teacher and earns only £20,000 a year.

If the rent were allocated to her, by way of some kind of transfer of the right to receive the income, it would bear the basic rate (20%) of income tax. Also, by the same token, Mrs Brown would not be affected by the new ‘Osborne tax’ which, over a phased four-year period, is denying interest relief for buy-to-let mortgages for the purposes of higher rate income tax. This new tax imposition doesn’t apply to basic rate taxpayers. So, having agreed on a deal with the mortgage company, Mr Brown arranges to transfer the ownership of the property to his wife. This is free of CGT and exempt from IHT, for the reasons I’ve given above.

However, what Mr Brown failed to spot is the fact that, under the SDLT rules, Mrs Brown is treated as if she had ‘paid’ him the £200,000 figure, which is the amount of the mortgage she is taking over from him. It is a kind of consideration because assuming a liability to pay a third party is equivalent, financially, to paying an amount of money.

So, the solicitor has to break the news to Mr and Mrs Brown that there is SDLT to pay on a transaction valued at £200,000 and, of course, this attracts the new extra 3% SDLT because the buy-to-let property isn’t Mr or Mrs Brown’s only property that they own.


The remedy
What should the Browns have done, in our example? Well, one thing Mr Brown could have done, in his particular circumstances, was to pay off the mortgage or at least reduce it below £40,000, before doing the transfer. That way, the consideration is correspondingly reduced and the transaction can be brought below the SDLT threshold (for second properties) of £40,000. There’s actually nothing stopping Mrs Brown, in our amended example, refinancing the property later on and putting the drawdown of the refinancing funds into the joint matrimonial finances – providing this wasn’t part of an overarching plan at the time the transfer from Mr Brown was done. 

In other cases, of course, things aren’t going to be as simple or easy as that. I’ll show what I mean by using an example where the circumstances are very different.


Example 2: Family investment LLP

Mr Smith has a very large buy-to-let property portfolio, with an estimated gross value of £10 million, subject to mortgage loans of £4 million. His policy has always been to ‘gear up’ his property holdings in order to acquire more such investments. In practice, the whole of the rental yield from this substantial portfolio is used in paying interest and repayments of capital on the mortgage loans. So, Smith has no spare cash with which to repay any of the loans.

Comparatively late in life, he marries Mrs Smith, who, unlike him, is currently a non-income taxpayer. He would love to bring her in as a joint owner of the portfolio, but the problem is that, even if the mortgage company were agreeable to bringing her in as a joint debtor on their loans, the transfer would be treated as an SDLT chargeable ‘payment’ by Mrs Smith of half of the loan balance, that is £2 million. The SDLT liability on this, under the rates which now apply, frankly put this option out of court. So, what does Mr Smith do to bring about the situation whereby the rents are divided between the two of them, and the consequent income tax liabilities mitigated?

The answer is: he forms a family investment LLP in which he and his wife are both members. He then introduces the property portfolio into the LLP.


Under special rules which apply where land and buildings are introduced into a partnership (for reference, these rules are in FA 2003, Sch 15) the basic principle which applies SDLT to the amount of the mortgage loan balance is overridden by a completely separate set of provisions specially introduced for the purposes of charging SDLT on partnerships and limited liability partnerships. 

The rules are complex, and might appear to be written in a particularly obscure dialect of Chinese; but the upshot of them is that the value for SDLT purposes of a transfer into a partnership or LLP is equal to whatever proportion of the gross market value of the properties is passing out to persons who are not individuals connected with the introducing partner. Because spouses are, of course, connected under these rules, there is a nil chargeable consideration for SDLT purposes, and therefore no tax payable. 

Practical Tip:
It has to be said that setting up an LLP for this purpose is only likely to be worthwhile where the amount of SDLT saved is substantial (because the property portfolio being introduced is substantial). But it’s worth noting, as a final point, that this effective SDLT exemption for spreading the ownership of UK land and buildings doesn’t just apply to spouses, but can also be used where it is wished to transfer value or income to other closely connected family members, such as adult children. 

This article was first printed in Property Tax Insider in December 2017.

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