SDLT on change in beneficial ownership between spouses

I have a married couple who own a number of rental properties jointly as joint tenants. As wife is earning less than husband, they want to enter into declarations of trust reciting larger percentage owned by wife (95% /5%) for income tax purposes. Content on that side of things and the form 17 which needs to be filed with HMRC. However, the properties are all subject to mortgages and I am having a crisis of confidence regarding Stamp Duty Land Tax. All the examples and HMRC guidance seem to indicate that where a recipient gives consideration by taking on a debt or releasing/indemnifying there may be stamp duty land tax to pay depending on the sum involved. In this case however, despite the change in beneficial ownership, both parties will remain jointly and severally liable to the mortgages both before and after the transaction in which case there is no ‘consideration’ for SDLT? Am I being daft or do I need to consider SDLT?

Caroline Bates
Firm: Wright Hassall

I think you do need to consider SDLT, because HMRC consider that the assumption of liability for a mortgage debt constitutes consideration for the transfer- even on transfers between husband and wife. It is possible I believe to escape this if it is expressly provided that the donor retains sole responsibility for the share of mortgage interest corresponding to the share transferred. But that seems to me to be incompatible in the case of investment properties with the claim to treat the mortgage interest as a deduction in the computation of income for income tax purposes- which is probably worth more in the long term.

Tim Gibbons

As between themselves they are currently responsible for 50% of the mortgage. If the wife takes on responsibility for an extra 45%, and if this is more than £40,000 in the case of residential properties, then sdlt will apply at the 3% rate, and if more than £125,000 then at the normal rate above that.

Simon Northcott

The properties are all jointly owned and mortgaged. Following the transfer of a % of the beneficial interest from H to W if their respective liabilities to the mortgagee remain unchanged (which prima facie would be the case) and there is no agreement between them as to who bears any of the mortgage payments then I would suggest para 8(1A) Sch 4 FA 2003 is in point and thus no SDLT charge arises as no chargeable consideration has been provided by W.

Regarding income tax, as both H and W are joint borrowers then any interest paid by either will in principle be tax deductible.

Malcolm Finney

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There seems to be a substantial difference of opinion here re SDLT. Is there another problem with these arrangments in many cases: this being the possible obligation to inform the lender of the change in beneficial ownership under the terms of most mortgages. The change of course has to occur for the wife to be treated as taxable on 95% if the income. As both H & W remain liable to the lender its position is not prejudiced but is there not a duty to disclose the change to the lender which might just scupper the arrangement anyway? Is it agreed that there is often such a duty to disclose, and I would be very interested to know how fellow practitioners deal with this obligation.

Shaun Freeman
Freemans solicitors

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The main thing, as always, is to know what you are trying to achieve and to make sure that is what the document says. If it says the mortgage liability does not change so it is different from the beneficial shares, then no sdlt.

As for Shaun’s point, I suspect this is more often honoured in the breach than otherwise, and the mortgagee is not told. Indeed, it is because of the mortgage that this is more often than not done in a declaration of trust rather than a transfer. That will not affect the tax result, even if it may cause other issues.

Simon Northcott

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I agree with Tim that there is a conflict here between the SDLT and Income tax position. It will depend on the exact scenario, but it seems highly unlikely that the husband would be able to justify deducting 50% of the mortgage interest against 5% of the rental income. Equally, if the wife is in practice paying 95% of the interest it might be argued that, without a transfer of obligation that would trigger an SDLT charge, 45% of the interest is not “wholly and exclusively” incurred for her personal rental business - but rather a gift to her husband to meet his liabilities. I have not considered this fully, and the facts may not justify the extra complication and costs - but could constituting a formal partnership or LLP assist?.

I accept that it may not be uncommon for the lender not to be informed, but surely the key thing is to check the precise obligations and advise the clients on the potential implications - however remote they may be.

Phil Moss
Lubbock Fine

I’m not sure I’m in total agreement with Phil Moss’s comments.

I agree that seeking to deduct 50% of the aggregate interest cost against only 5% of the gross income is likely to prove problematic as this may well create artificial losses.

However, on the basis that there is no agreement between H and W as to how any interest cost on the joint borrowing is to be borne, if W should discharge 95% of the interest cost (and receive 95% of the income) this should be fully deductible as it has been incurred wholly and exclusively. W is not discharging any of H’s interest obligation; H and W are each jointly and severally liable. There is no gift.

Malcolm Finney

I agree with Simon. If there is no agreement to ‘change’ the share of the mortgage liability each party is responsible for, then there should be no sdlt issue.

As regards, the ‘technical’ breach of mortgage conditions, how relevant is this? I recall reading a Sweet and Maxwell Declaration of Trusts handbook which is now on its fifth edition and I don’t think the point is raised. Has anyone ever had experience of a mortgage company taking the point, or has any practitioner ever advised the mortgage company that the declaration of trust has, or will be entered into?

Haroon Rashid
I Will Solicitors Ltd

I must confess to never having read all the terms and conditions attached to any mortgages over my own properties let alone those of my clients. Nevertheless, I have noted comments made suggesting that a change of beneficial interests in a property subsequent to the granting of any mortgage requires notification to the mortgagee.

Assuming that such notification is required is this notification not a matter for the mortgagor(s) alone? This must I assume be so where any declaration of trust is executed by the trustees without legal advice or awareness on the part of any solicitor. Even if legal advice is taken and a solicitor prepares the declaration for execution (the solicitor not at that time acting for the mortgagee, I assume) is the solicitor under any duty to notify the mortgagee or would this constitute a breach of confidentiality vis a vis the client(s)?

Why is a requirement to notify the mortgagee of a subsequent change of the beneficial interest in the property included in the mortgage in any event? On the basis that any underlying beneficial interest (I assume) would be overreached I fail to see how the mortgagee’s legal charge is in any way adversely affected by changes in the underlying beneficial interest.

Malcolm Finney

In terms of the SDLT point, in order to calculate the consideration chargeable by virtue of assumption of debt, FA 2003 Sch 4 Para 8 (1B) provides “the amount of secured debt assumed shall be determined as if the amount of that debt owed by each of those persons at a given time were the proportion of it corresponding to his undivided share of the property at that time”, so for SDLT purposes, W is deemed to be assuming a proportion of the debt irrespective of the legal position in relation to the mortgage.

Stephanie Parker

I am not sure that the SDLT point is as clear as you suggest.
FA 2003 Sch 4 Para 8 (1B) only applies if Para 8 (1)(b) applies, which is where the chargeable consideration consists in whole or part of the assumption of existing debt by the purchaser.
If you look at HMRC’s manual guidance at SDLTM04040 and the examples provided, they only cover the position where solely owned property subject to a debt is transferred into joint ownership or jointly owned property subject to a debt is transferred into sole ownership.
I think that it will depend upon the documentation of the transfer as to whether the purchaser assumes existing debt.

Carlton Collister
landtax llp