The Hidden Costs of Acquiring a Home in London – Part 2

The most expensive hidden costs are taxes. These come in varying guises, and it’s essential you speak to your tax advisor before you start searching for a property so that you can put the correct structure in place before you put forward an offer. This will allow you to move swiftly when the best opportunities arise, and will increase your chances of achieving a good price.

If you’re buying an investment property, the taxes you’ll need to consider include capital gains tax, inheritance tax, and income tax. You’ll need to consider whether the most effective way to acquire the property will be through a trust, an off shore company, or in somebody else’s name, e.g. a spouse or dependent. Again this will have implications for the solicitor’s costs because that adds another layer of complexity to the acquisition.

The Council Tax will cost you roughly £2,000 a year, but you pay it on a monthly basis.

A mansion tax has also been mooted by the government, and we will keep you updated on any firm news on this subject.

However, the single biggest up-front expense is Stamp Duty Land Tax. This is charged at 5% of the purchase price of the property over £1million and at 7% over £2million. But it rises to a shocking 15% of the acquisition price if a £2m+ property is acquired by a “non-natural person”. This is something that has recently been brought in by Her Majesty’s Revenue and Customs and the Government. A "Non-natural person" is generally a trust or offshore entity. There are ways to acquire a property and retain one’s anonymity without paying the 15%, but you need to speak to your tax advisers about this.

Now, Stamp Duty Land Tax in my view is a disgraceful tax and the recent rises in the level of tax have been politically motivated – the government knows that the average voter thinks that the rich have too much money, so it’s an easy vote winner to raise the stamp duty on £2m+ properties. No-one ever stops to ask how the rich got rich or whether our government is capable of intelligently and efficiently utilising the tax income. That is a discussion for another day, but I’m sure you can guess my thoughts on the matter.

The point is you may have heard of ways to avoid Stamp Duty but you need to be very careful. The avoidance schemes split opinions massively. There are many solicitors who say you should avoid them altogether but there are other solicitors whose view is that it’s their duty to get the best deal possible for their clients and therefore they should be promoting Stamp Duty avoidance schemes. It’s an incredibly specialist, niche field which is where a lot of the confusion arises. Most people, including most solicitors, do not really understand the schemes or whether they are legally binding. Indeed, there are a lot of sales people pushing schemes that simply do not work. We know of two people who really understand this field.

To give you an idea of how rarely these schemes are used, in eleven years of acquiring properties for clients not one of them has ever acquired a property using a Stamp Duty avoidance scheme. There are schemes that are acknowledged to work but for me there have always been two major concerns for clients. Firstly, if you’re high profile – if you’re a celebrity or just a very well-known business person – there is the reputational risk: Should you be challenged for doing a Stamp Duty avoidance scheme, even if it’s legal, there is the reputational risk of the papers finding out and the ensuing articles along the lines of “Oh look, they’re rich and trying to avoid tax.”

The issue that has always concerned me more, though, is what I call the risk of escalation. There are a few schemes that have been proven to be legal when challenged by the tax authorities. The problem in my mind, though, is that if the tax authority sees that you have outwitted them in this instance, will they then escalate this and give you a full audit? Now it doesn’t really matter if your tax affairs are totally in order. Do you really need the hassle and stress of a major audit from the authorities? Speaking to my clients about this over the years this certainly seems to be something that they could do without, so we have never ever acquired a property through a Stamp Duty avoidance scheme.

The legislation on this is changing and appears to be changing on a regular basis. So if you’re considering using a Stamp Duty avoidance scheme please do contact us and we can talk you through the subject in more detail.

So those are the hidden costs of acquiring a property in London. They are significant and once you add them all together you can pay an additional 10% of the purchase price (or more if using an off-shore company) in related fees and taxes.

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Yours for a successful home acquisition,


Jeremy McGivern
Mercury Homesearch

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