“Linked Transactions” and Stamp Duty Land Tax.

Stamp Duty Land Tax (SDLT) is payable by the purchaser of land. The rate at which it is paid ranges between 1% and 4%, and depends on the amount paid for the land – the “chargeable consideration”.

Currently, on most residential property, no SDLT is payable if the “chargeable consideration” is less than £175,000 (this is due to revert to £125,000 at the end of this year, unless it is extended again). Between £175,000 and £250,000, the rate is 1% of the whole amount paid, so buy a property for £175,000 and you will pay no SDLT; buy one for £175,001, and you will pay £1,750. Between £250,000 and £500,000 the rate is 3%, so if you buy for £250,000 you will pay £2,500, buy for £250,001 and you will pay £7,500. Above £500,000, the rate is 4%.

Where a transaction approaches any of these thresholds, there is obviously a temptation to try to split it into two or more smaller transactions, in order to get below the threshold of £175,000, or to drop from 3% down to 1%.

Suppose Mr and Mrs Wiseguy are buying a house with a garden. The agreed price is £300,000, which would put them into the 3% SDLT band and produce a tax bill of £9,000. Mr Wiseguy has an idea.

“Sell me the house for £150,000, and sell my wife the garden for £150,000, and we’ll pay no SDLT”, he suggests. The vendor objects that the house is obviously worth more than the garden, so Mr Wiseguy says “OK – but sell me the house for £250,000, and sell my wife the garden for £50,000 – that way I pay only £2,500 and she pays nothing”.

Unfortunately for Mr Wiseguy, the legislation on “linked transactions” will frustrate this clever wheeze. This says that if two or more land transactions are part of a “single scheme, arrangement or series of transactions between the same vendor and purchaser, or, in either case, persons connected with them”, then the rate of SDLT is found by adding together all the transactions within the “series of transactions”.

In Mr Wiseguy’s case, his wife is a “connected person”, so the £250,000 for the house and the £50,000 for the garden are added together, the SDLT rate is 3%, and Mr Wiseguy pays SDLT of £7,500, and his wife pays £1,500.

These “linked transaction” rules are most often a problem in cases where a developer is selling several properties to the same buyer. If the developer offers any sort of discount for buying more than one property (say, buying two flats rather than one), then the purchase of each is likely to be “linked” to the others and the rate of SDLT payable will increase accordingly.

If you swap your house with another homeowner, then (assuming no cash changes hands), you will each pay SDLT based on the market value of your old house (which is the “consideration” you have given to acquire the new property). If the two houses are of different values, so that one of you pays some cash (known as “equality money”) as well as transferring their old house, then the payer of the equality money pays SDLT on the value of the old house plus the cash, and the other party just pays on the market value of his old house.

Until 2007, however, there was a nasty trap if the other party to the exchange was “connected” with you – for example, your parent, child, or brother or sister. In that case, the “linked transaction” rules kicked in and the SDLT rate was calculated on the combined values of the two properties. The 2007 Finance Act amended the rules, however, to remove this clearly unfair quirk in the legislation.