As of 1 April 2016 you might have to fork out an extra 3% in Stamp Duty Land Tax if you're buying an additional home. Find out how the controversial tax loading works with our Q&A.
UPDATED ON 5 DECEMBER 2016
Q. What is the 3% Stamp Duty Land Tax (SDLT) surcharge?
A. It's a 3% loading on existing Stamp Duty rates, which are set out on the table below:
Q. Who has to pay it?
A. Anyone who is buying an additional residential property for £40,000 or more. This could mean a holiday home, buy-to-let or even a main residence you plan to live in (more detail on this later).
Even if you already own just a share in another property, it will count so long the share is worth £40,000 or more.
Properties anywhere in the world are considered too. So, if you own a 30% share of a £300,000 ski chalet in Bulgaria and are buying your first home in the UK, you’ll be stung with the extra tax.
The higher rates of Stamp Duty applies to the purchase of property in England, Wales, Northern Ireland and – under a separate announcement in the Scottish Government's 2015 pre-election Budget – in Scotland too.
This Q&A refers to the rules in England, Wales and Northern Ireland which are administered by HMRC.
Q. When did it kick in?
A. The new surcharge took effect from 1 April, 2016, but it was first announced in the Chancellor’s 2015 Autumn Statement. To avoid paying it, you'd have had to complete (not just exchange contracts) on any second home purchase by midnight on 31 March, 2016. (Unless you'd already exchanged on or before 25 November, 2015, the date when the new tax was announced).
Q. How is the tax charged?
A. Regular Stamp Duty is, these days, charged on a tiered basis (so you only pay the higher rates on the slice above any threshold – the same as income tax). But the 3% surcharge still effectively works as a slab tax. In other words, the 3% loading applies to the entire purchase price of the property.
Q. How much does that translate into?
A. As an example, if you are buying a second home with a purchase price of £300,000, just the extra 3% Stamp Duty would equate to £9,000 (3% of the entire price). This is in addition to the £5,000 regular Stamp Duty bill on a home of this value, bringing the total payable an eye-watering £14,000.
To get an overall Stamp Duty figure on a second property, work out the regular cost first with our handy calculator. Then calculate 3% of the purchase price and add the two figures together.
Q. What if the home I am buying will be my main residence?
'Main residence' refers to the home you live in, not just a property you own. And which home is your main residence will be judged as a matter of 'fact' (for example, where you spend most nights, where the rest of your family lives, where you are registered to vote and where you are signed up to local doctors and dentists). You won't be able to 'elect' a main residence as you can for the purposes of Capital Gains Tax.
If the home you are buying replaces your main residence, you will not be liable for the 3% surcharge, even if you own an additional property/properties (such as a second home, or let flat) at the same time. This example is straight from the Government's consultation document:
"A owns both a main residence and a second home. She sells her main residence and purchases a new one. Although she has two properties at the end of the day of the transaction, she has replaced her main residence so the higher rates will not apply."
But replacing your main residence means the last one (or at least a 'major interest' in it) will need to be disposed of (eg, SOLD or GIFTED). If you are moving out of rented accommodation or, say, your parents' home this will NOT count as disposing of your main residence as you are not an owner or part-owner of that property.
Q. What if I need to buy another main residence before I can sell my last one?
A. If you move out of your main residence (Home A) but keep it and buy another main residence (Home B), you will have to pay the 3% Stamp Duty surcharge initially.
However, so long as you sell Home A within 36 months (increased from 18 months in the March 2016 Budget) of completing on the purchase, HMRC will make a full refund.
The refund applies, in fact, to the sale (or other disposal) of any property that has been your only or main residence at some point during the 36 months leading up to the purchase (ie, you don't have to be moving directly out of one main residence and into a new one).
How long you have lived in a previous main residence will not be relevant.
Q. How will the refund work?
A. You’ll need to complete one of HMRC’s repayment request forms and submit it within three months of the sale. Until an online version is available, you’ll have to print off this form and post it to HMRC’s Birmingham Stamp Office. HMRC says it aims to process all repayments within 15 working days of receiving the information requested. Payment, if successful, will then be issued by payable order. If you are not successful, HMRC says it will write to you and explain why.
Q. What if I sell my main residence but I'm not able to buy another one straight away?
A. In some cases, (for example, if you are moving back to the UK after living abroad), you may have sold (or may have to sell) your main residence but move into a 'stop gap' home before you can buy a new one.
In this case, with effect for purchases made after 26 November 2018, the rules allow for a 'grace period' of 36 months (increased from the proposed 18 months by the March 2016 Budget) during which time the purchase of your next main residence will NOT be subject to the 3% surcharge. This is so long as the former residence was your main or only home at some point during the 36 months leading up to buying the new one.
In summary, there are TWO 36-month tests:
- One says you must have lived in the sold property in the 36 months leading up to the sale
- The other says you must buy the replacement property within the 36 months following that sale
HOWEVER, for purchases made on or before 26 November 2018, these two '36-month tests' do NOT apply.
In other words, if you are buying a new main residence now or any time soon, it can be possible to use...
a) the sale of a main residence made many years ago
b) a recent sale of a property that was your main residence many years ago
...to escape paying the extra 3% on the purchase.
Find out more with John Shallcross' article: The all-important rule that could see you escape paying higher rates of Stamp Duty
Q. What if I already own a property, but I'm buying with someone who doesn’t?
A. Unfortunately, even if just one of you already owns a home (whether you are living in it or not), when you go to buy another one together, the 3% Stamp Duty surcharge is likely to apply to the whole transaction. (For exceptions, refer back to the rules around replacement of a main residence.)
However, so long as you are NOT married, it's possible to get around this by the person who does not already own a property, buying the new one in their sole name. We've had confirmation from HMRC that this will NOT be regarded as tax avoidance.
But John Shallcross, real estate lawyer and SDLT expert at law firm Blake Morgan says: "It's important that the full beneficial ownership belongs to the other person. It does not work, for example, to have the property in the name of that other person, but holding on trust for the two of you."
One problem with putting a new home in just one person's name is satisfying the lender's affordability criteria. But Ray Boulger, senior technical director at mortgage broker John Charcol, said that some banks including Metro Bank and The Woolwich allow two names on the mortgage agreement but just one name on the property deeds.
Q. What if I am married and one of us owns a property?
A. The strategy of having one person (the one without an existing property) buy the new home does not work if you are married or in a civil partnership. This is because the rules will treat you as if you were joint buyers anyway, even if you're not. "This is in contrast to the way married couples and civil partners are treated for other taxes," says John Shallcross.
Q. What happens if I've split from my partner but I still have a share of our former home?
A. If you are separated or getting divorced and want to buy a new home to live in but you still have a share (worth £40,000 or more) of your previous home (which is NOT being sold), this will constitute buying an additional property which means the 3% surcharge is likely to apply.
However, if you go on to sell your share of the home back to your former partner (or sell the home entirely) HMRC will provide a full refund. This will come under the same replacement of a main residence rules set out above.
But John Shallcross warns: "If the new purchase is made BEFORE the sale of the interest in your former home, there are the three-year rules to look out for. They state that you will need not only to dispose of the interest within three years of buying the new home, but also to have lived in the former home as your main or only residence within the three years leading up to the purchase."
Q. How do I work out if the value of my share is worth £40,000 or more when there is a mortgage?
A. The £40,000 test is worked out on the market value of your share in the property BEFORE the mortgage is taken off. For example, if you own a house with your former partner that has a value of £240,000 and an outstanding mortgage of £200,000, your share will be worth £120,000.
It will NOT be worth the £20,000 (£240k value minus the £200k mortgage divided by 2) that you might each expect on the sale of a house.
Q. I'm separated but still legally married. Will I still be linked for tax purposes if I buy a property alone?
A. If you are part of a married couple but living separately in circumstances that are likely to become permanent, then if one buys a property the other will NOT automatically be treated as a joint buyer for the purposes of the 3% surcharge. In other words, if you are buying a home that only incurs the 3% surcharge on the basis of your legal spouse's situation, you won't have to pay it.
Q. I have a second home but want to buy a further share in the one I live in. Will I be affected?
A. Purchasing additional interests in your existing home may be subject to the higher rates if you own other properties on the date of the purchase. Similarly, transferring an interest in a property to your spouse (perhaps to put them on the mortgage agreement) can result in the charge.
Again, the higher rates will only apply where additional properties are owned at the time of the transaction and the payment is £40,000 or more. John Shallcross says: "It's always worth checking the rules around replacement of a main residence to see if they can save you."
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Q. I am extending the lease of my leasehold flat. Surely the 3% surcharge can't apply to that?
A. Unfortunately, it can in some situations if you are paying £40,000 or more for the extension and have interests in other residential properties. However, the rules are not easy to apply here. HMRC's Guidance Note (of March 2016) had not addressed this kind of case. But the amended guidance published on 29 November 2016, mentions it briefly as a recognition that the replacement of only or main residence exception can apply. (Click here to see it under paragraph 36.A, chapter 9, example 13.)
Q. Can I avoid the surcharge by setting up a limited company?
A. The Government has a keen eye on preventing tax avoidance with this levy, so you won't be able to escape the surcharge by setting up a limited company for the purpose of buying a home or homes.
Q. What if I already have a limited company?
A. The surcharge will still apply when buying a residential property through an existing limited company.
Q. What if the home I want to buy has a 'granny flat'?
A. The 3% surcharge was initially always going to be applied to any property with an annex or additional property purchased alongside a main residence if the annex/additional property had a value of £40,000 or more and could be used as an independent dwelling.
However, due to what it described as a 'technical unfairness', the Government made an amendment to the Finance Act 2016 to reverse this. Now, so long as the annex is bought alongside the main residence, it will NOT always be subject to the higher rates of Stamp Duty. (To benefit from the amendments, an annex must be within the grounds of the main home and be worth no more than a third of the total transaction value.)
The Treasury explained: "Under the new rules, if you buy a main residence (either your first property or a replacement for a previous main residence) worth £250,000 and an annex capable of separate sale worth £50,000 in a single transaction, Stamp Duty at the standard rates will be charged on the total value of £300,000.
HMRC confirmed that anyone who may have already paid the extra surcharge under these circumstances since 1 April, 2016, should have it refunded on application once the Finance Act became law on 15 September 2016.
Read more on this with John Shallcross' article: Buying a home with a granny flat? Find out if the 3% Stamp Duty surcharge could affect you
Would 3% extra Stamp Duty put you off buying a second home?— Zoopla (@Zoopla) March 16, 2016
Q. What if I am a major property investor?
A. It was confirmed in the March 2016 Budget that major investors in residential property will not be given a special exemption from the 3% surcharge. (In its initial consultation, the Government had earmarked 'bulk buyers' of 15 or more residential homes for exclusion as they were deemed to be 'contributing towards new housing supply'.)
If you are purchasing at least 6 dwellings however, you can choose whether to pay Stamp Duty at non-residential rates or claim multiple dwellings relief. If you choose to claim multiple dwellings relief in that situation, the higher rates will apply – the minimum rate payable being 3% for purchases with an average value of up to £125,000.
Q. What if I inherit my property?
No Stamp Duty is normally payable on properties that are inherited, so the 3% premium will not be relevant. That said, if you have inherited a property and go onto purchase an additional home without selling it, you may well be hit with the surcharge.
The March 2016 Budget did give some reprieve to inherited properties, however. The Government confirmed that a small share (50% or less) in a single property which had been inherited within three years prior to buying another home (which would otherwise attract the 3% surcharge) will NOT count against you for surcharge purposes.
Q. Are there any exemptions?
A. You won’t pay the 3% Stamp Duty surcharge on additional homes that cost less than £40,000 (see 6 homes on Zoopla for under that budget), or on caravans, mobile homes and houseboats.
The purchase of non-residential properties (such as offices or warehouses) will not attract the higher rates of tax. Neither will owning any of these cause a purchase of a dwelling to be liable at the higher rates.
The purchase of a mixed-use property (a flat above a shop for example) will not attract the higher rates of tax. But if you already own a mixed-use property (which includes a dwelling) and want to buy an additional property, it will count against you for the higher rates.
Social landlords and charities won't be liable for the 3% loading, if the usual Stamp Duty exemption applies to them.
And, while it's not an exemption, it's worth noting that if you pay Capital Gains Tax on the sale profits of an additional home, you can offset the cost of the 3% Stamp Duty surcharge against your gain.
Q. Do plots of land count?
A. The 3% loading will only apply to purchases of 'dwellings'. A plot of land (even if it will subsequently be used for a home) is not counted as a dwelling, so the surcharge will never apply. There is a limited exception for some 'off-plan' purchases where the contract provides for a dwelling to be built.
Similarly, if you already own a plot of land and are buying an additional property, it will not be considered for purposes of the higher rates of tax.
Q. What about timeshare homes?
A. A timeshare home – overseas or in the UK – will only be considered for the purposes of the higher rates of Stamp Duty if it is a dwelling AND you have a share in ownership which is equivalent to either a freehold or a lease with a term of more than seven years. However, as many timeshare deals are contractual agreements to occupy a property that is owned by another person, this will not be relevant.
Q. What about other homes specifically designed for holiday use?
A. Holiday homes – even if they are furnished holiday lets or they come with restricted use during the year – will be treated the same way as any other additional property purchases, according to HMRC.
Q. Can I just omit to mention to my solicitor about the fact I already have a home?
A. Stamp Duty Land Tax is a self-assessed tax and it's your responsibility to make an honest return, having taken appropriate advice where necessary. If you do not complete the return honestly, it's tantamount to fraud – penalties for which could be a lot worse than a 3% Stamp Duty loading.
Q. Is all this set in stone?
Yes. The final policy design was announced in the Chancellor's Budget on 16 March and it kicked in as planned on 1 April 2016.
The law was first applied under what's known as Budget Resolutions. But the Finance Act, which came into force on 16 September 2016, replaced the Budget Resolutions with certain amendments, the most significant being the granny annex rules (explained above).
Q. What official guidance is there?
HMRC issued a Guidance Note on Budget Day (16 March, 2016). But it was criticised as being misleading in places and failing to deal with many feasible situations. HMRC issued revised a Guidance Note on 29 November. John Shallcross, who had been consulting on the drafts, told us the changes included the following:
- Amendments to granny annex rules, as explained above.
- Clarification of how replacement of only or main residence rules apply with a much wider range of examples.
- Mention that lease extensions can be caught by the surcharge.
- Clarification of how rules apply where a property is bought in someone's name but just as a nominee and with no beneficial interest.
Q. What's Zoopla's view?
The (then) Chancellor’s decision to go ahead with plans to introduce a further 3% increase in Stamp Duty on buy-to-let properties and second homes, is the latest in a series of short-sighted policies aimed at the property market.
Zoopla's Lawrence Hall said: “When this tax was introduced, HMRC predicted it would affect around one in 10 residential property transactions. But the latest figures (Q3, 2016) show it's closer to one in four. If people are put off from buying good homes to rent to tenants, it will ultimately make renting more expensive - and eat into people's ability to save for a deposit for their own place.”
Q. I need help working out whether the higher rates of Stamp Duty are due. What should I do?
Telephone: HMRC Stamp Duty helpline on 0300 200 3510 (lines open 8.30am to 5pm).
Write to: HM Revenue and Customs – Birmingham Stamp Office, 9th Floor, City Centre House, 30 Union Street, Birmingham, B2 4AR. (HMRC has a 20 working day lead time for replies.)
Tweet: @HMRCCustomers with your query (account is serviced between 8am and 6pm). Be sure not to disclose any personal details on social media.
Post a comment on Zoopla: Or join the discussion comments below. Your entry will not appear immediately as comments are subject to moderation, but they'll usually be posted by the next working day. Please 'vote up' comments that you deem particularly helpful. And bear in mind that any responses do not constitute financial or legal advice.
Do some research: This is the Government's initial consultation and this is its summary of final responses. This is Government's first guidance notes document on the tax (issued on 16 March, 2016). And here is the amended Guidance Note published on 29 November 2016.
If you really want to get into the nitty-gritty, take a look at the legislation itself (Finance Act 2016 section 128). A quick way to find what you are looking for is to press Cntrl/F on your keyboard and search for a key term.
- Find out more with our buy-to-let guide
COMMENTS DO NOT CONSTITUTE FINANCIAL OR LEGAL ADVICE AND ARE PROVIDED FOR GUIDANCE ONLY. IT IS ASSUMED THAT PROPERTIES ARE IN ENGLAND OR WALES UNLESS STATED OTHERWISE.