Stamp Duty Implications for Inherited Property: Key Considerations and Options

I assume for the purpose of this article the taxpayer doesn’t own any other dwelling anywhere in the world other than the property recently inherited.

Option 1: If you buy your 2 siblings out.

You often see transactions that are known as staircasing, where you’re a first-time buyer, and you effectively purchase the property in stages from the qualifying body, e.g., a housing association or local housing authority. Please see the following manual: SDLTM29890.

However, as the taxpayer has recently inherited a share (already has an interest) and is buying a further interest from a non-qualifying body, it may be subject to a higher rate charge.

The higher rates for Stamp Duty Land Tax (SDLT) came into force on 1st April 2016. The higher rate is calculated as a 5% surcharge for transactions after 31 October (previously 3% in England—rates vary in Scotland and Wales) on the standard rates and applies to all purchases of a second residential dwelling unless an exemption applies.

However, there may be scope for relief on the higher rate charge in 2 areas:

• Recently inherited property.

SDLTM09795 outlines that is a beneficiary receives an interest in a dwelling within three years before they conduct a chargeable transaction (like buying another property), this inherited interest may not be counted for determining if higher SDLT rates apply.

I will expand on this later: option 2

• Staircasing

This is where the taxpayer owns a 25% interest in a property, and you purchase a further interest in a property that has been your main residence in the last 3 years. More information can be found. SDLTM09814. Your client recently inherited their shares, and therefore their ownership is likely to occur when the mother passed away, and therefore, they did not have a relevant valid interest when looking at the last 3 years provisions.

Option 2: If they purchase a new property and rent out the recently inherited property.

As outlined earlier, an inherited property in the last 3 years may be ignored as an interest in another dwelling per SDLTM09795.

Where a person becomes entitled to inherited property, such an interest in the three years before a chargeable transaction, the interest can be ignored for the purposes of determining whether the transaction is a higher rates transaction [Para 16(2)] provided that:

• The beneficiary became a joint owner of the interest by inheritance [Para 16(1)].
• The beneficiary’s and any spouse’s or civil partner’s combined interest has not exceeded half of the major interest in the three years before the effective date of the chargeable transaction [Para 16(4)].
• Where an interest is held as a tenant in common, the declared interest held by the owner and their spouse or civil partner must be 50 percent of the whole interest or less. Where an interest is held as joint tenants, the owner and any spouse or civil partner who is a joint tenant must make up either strictly half or a minority of the joint tenants.

In summary of the last 2 conditions, if that person subsequently acquires the whole of the beneficial interest in the property concerned or increases his beneficial interest to above 50%, that person is, from that time, treated as having the major interest for the purposes of these rules.

This may cause issues for your client as they are intending on buying 100% of the property.

If such an interest was inherited more than three years before the chargeable transaction, then it will count as an interest in another dwelling at the end of the day of the effective date of the chargeable transaction.

Remember the rental income is reportable if it’s not covered by allowances.

If you have any further queries, please feel free to contact the helpline.

Kabita Tank
Tax Advisor

For more information, contact us at consultancy@vantagefeeprotect.com