Q. What is the 3% Stamp Duty Land Tax (SDLT) surcharge?
A. It's a 3% loading on regular stamp duty rates, which are set out on the table below. It's important to note that the current stamp duty holiday means that until 30 September 2021, the threshold at which stamp duty kicks in stands at £250,001. Read on to find out how this impacts tax payable on additional properties.
HMRC calls it the 'Higher Rates on Additional Dwellings' or HRAD for short.
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 as 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 could be stung with the extra tax.
The higher rates of Stamp Duty Land Tax apply to the purchase of property in England and Northern Ireland and – under separate sets of legislation – in Wales and Scotland too.
This Q&A refers to the rules in England and Northern Ireland which are administered by HMRC. See further down the Q&A for more on Wales.
Q. When did it kick in?
A. The surcharge took effect from 1 April, 2016, but it was first announced in the Chancellor’s 2015 Autumn Statement.
Q. How is the tax charged?
A. Regular stamp duty is now 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. These calculations are based on regular stamp duty rates, not the current stamp duty holiday rates.
Q. How does the stamp duty holiday impact the surcharge?
A. The Chancellor Rishi Sunak introduced the temporary tax cut on 8 July 2020, raising the threshold at which regular stamp duty kicks in from £125,001 to £500,001 in England and Northern Ireland. That threshold has now been reduced to £250,001 until 30 September 2021.
However, the 3% stamp duty surcharge still applies on top of the stamp duty holiday rates.
Q. What if the home I am buying will be my main residence?
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 a flat you rent out) at the same time. This example is 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 that a previous one will need to be disposed of (e.g., 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 constitutes a main residence?
A main residence refers to the home you live in, not necessarily a property you own. And which home is your main residence will be judged by HMRC as a matter of 'fact'.
This means it's not enough just to occupy a property. You'll need to demonstrate a degree of permanence and expectation of continuity for it to be your main residence.
For example, where you spend most nights and 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 are not able to 'elect' a main residence as you can for the purposes of Capital Gains Tax.
Q. What if I buy another main residence before I sell my previous one?
A. If you keep your former main residence (Home A) and buy another main residence(Home B), you will probably have to pay the 3% Stamp Duty Land Tax surcharge initially on the price of Home B.
However, so long as you sell Home A within 36 months of completing on the purchase of Home B, HMRC will make a full refund of the 3% paid on Home B.
The refund applies to the sale (or other type of disposal) of any property that has been your only or main residence at some point during the 36 months leading up to the purchase.
In other words, 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, so long it qualified as your 'residence' as outlined above.
Q. Is this rule changing as a result of the housing market being frozen during the coronavirus crisis?
A. Yes, the government is relaxing the 36-month rule for reclaiming the stamp duty surcharge.
An amendment has been introduced to the Finance Bill to allow an extension in exceptional circumstances. A new page in the HMRC manual explains the proposed changes here. The manual states: “If you purchased your new main residence on or after 1 January 2017, you may still be eligible to apply for a refund if you were prevented from selling your previous main residence before the expiry of the 3-year time limit owing to exceptional circumstances beyond your control.”
It adds: “Exceptional circumstances might include being prevented from selling the property owing to government guidance during the Covid-19 pandemic.”
Q. How does the refund work?
The time limit for applications has now been extended to 12 months from the date of the sale.
HMRC reserves the right to refuse late applications.
Q. How long do refunds take?
HMRC says it aims to process all refunds within 15 working days of receiving the application. As things stand, HMRC is close to this target, although refunds had previously been taking as long as 55 working days.
If your application is successful, payments will be issued by payable order. Although, from August 2019, HMRC says refunds should be available via a BACS transfer.
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 sell your main residence but move into a 'stop gap' home (such as rented accommodation) before you can buy a new home.
In this case, with effect for purchases which complete after 26 November 2018, the rules allow for a 'grace period' of 36 months 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 the interest of simplicity, there are two 36-month tests:
- One says you must have lived in the old property in the 36 months leading up to the purchase of the replacement property
- The other says you must buy the replacement property within the 36 months following the sale of the old property
HOWEVER, for purchases that completed on or before 26 November 2018, these two '36-month tests' did NOT apply.
In other words, if you completed the purchase of a property to live in as your only or main residence by 26 November 2018, it was 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.
Just to confuse matters further, these rules are not always implemented accurately – evidence of which is demonstrated in the case study of this article by John Shallcross, real estate lawyer and SDLT expert at law firm Blake Morgan.
Find out more with:
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 the main exception, refer back to the rules around replacement of a main residence.)
However, so long as you are NOT married or in a civil partnership, it can sometimes be 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, 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 Barclays allow two names on the mortgage agreement but just one name on the property deeds.
These are sometimes called Joint Borrower, Sole Proprietor mortgages, which John Shallcross explains more about in his article.
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.
Q. What happens if I've split from my partner but I still have a share of our former home?
A. If are married or in a civil partnership and are buying a property which completes after 22 November 2017 (the day of the 2017 Budget) there are special rules that can help you side-step the 3% surcharge when you go to buy a new home.
The rules state that, so long as you do not live in the property you are leaving and an appropriate 'property adjustment order' is made (to the benefit of the person who remains living there), the share you retain in it will NOT count against you.
However, these rules will NOT help you if:
- you never entered into a marriage or civil partnership
- you did... but did not obtain a property adjustment order
- your purchase completed before 22 November 2017
In any of these cases, you will still be liable for the surcharge if you retain your interest in your old property (worth £40,000 or more) when buying a new one.
However, if you go onto sell your share of the home back to your former partner (or sell the home entirely) you may be entitled to a refund. This will come under the same replacement of a main residence rules set out above.
But John Shallcross warns: "Where 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."
He adds that, in these cases, it's worth checking the property-owning history to see if it throws up something that could 'save the day', such as replacement of a main or only residence rules.
Q. How do I work out if the value of my share is £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 is likely to be worth £120,000 (or perhaps a discount would apply to reflect it being only a share in a property).
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.
Bear in mind that valuations are taken at the date of the NEW property purchase.
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 separated 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 would only incur 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 (if the payment is £40,000 or more).
But for purchases completing post-22 November 2017 (the day of the 2017 Budget) special rules mean that the surcharge will be exempt in the following circumstances:
- You already own at least a 25% share in a property and have lived in the property as your only or main residence throughout the period of three years leading up to the completion of the purchase of the extra interest
- A share is being transferred to you from a spouse or civil partner. (There are some limits though here; the new exception may not work if there are third parties with shares in the property and it does not work once the parties are separated.)
As ever, it's always worth checking the rules around replacement of a main residence to see if they can save you.
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.
But rules around leasehold extensions and higher-rate stamp duty have been difficult to pin down.
HMRC's first mention of it was in its now-archived guidance (published in November 2016) where it recognised that the replacement of only or main residence exception can apply.
But when this guidance was moved into HMRC's SDLT Manual, the relevant paragraph (3.6A) regarding lease extension was NOT brought forward.
However, later updates to the Manual made in October 2018 has seen it included again (see the Manual here and scroll down to Example 10).
And the good news is, this time it's even better as it demonstrates that one of the special rules for purchases completing from 22 November 2017 (the day of the 2017 Budget) could help.
They mean that, if you have lived in the flat as your only or main residence throughout the period of three years leading up to the completion of the lease extension, the new exception is likely to help and the surcharge will not apply.
Q. Can I avoid the surcharge by buying through a limited company?
A. No. You won't be able to escape the surcharge by setting up a limited company for the purpose of buying a home or homes. The extra 3% is due on nearly all purchases by limited companies, as there are very few for below the £40,000 threshold.
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. If the property is transferred into a limited company without a purchase price being paid, its market value usually applies for stamp duty purposes.
Properties already owned by your limited company however will not 'count against you' if you are buying a property personally.
Q. What about trusts?
A good starting point is with John Shallcross' article, 3% Stamp Duty; HMRC's guidance debunked.
Q.What if the home I want to buy has a 'granny flat'?
A. The 3% surcharge was initially 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.
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 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."
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 the inherited property, you may well be hit with the surcharge.
However, there is some reprieve for inherited properties. A small share (50% or less) in a single property which has been inherited within three years prior to buying another home will NOT count against you for surcharge purposes.
Your spouse and civil partner's property interests will also be considered (unless you are separated).
Q. What if I acquire a property by gift?
Stamp Duty Land Tax is due on the 'chargeable consideration', which is usually the purchase price, so a pure gift can be free of stamp duty. However, if there is a mortgage attached to the property, a proportion of its value can be liable for the tax. The same analysis is employed to see if the 3% surcharge is due.
Q. Do plots of land count?
A. The 3% loading only applies 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.
If construction has started but not finished on the plot of land it WILL count as a dwelling. (There is a limited exception for some 'off-plan' purchases where the contract provides for a dwelling to be built.)
If you already own an empty plot of land and are buying an additional property, the plot of land will not count against you for purposes of the higher rates of tax.
Q. What about derelict homes?
Existing homes that are derelict will only attract the additional stamp duty if they are 'suitable for use as a dwelling' on the day of completion.
But what constitutes 'suitable for use' is still under dispute, as was demonstrated when HMRC lost this recent court case.
Since that case, HMRC has made little comment on how to apply the rules. Although in this guidance to its definition of a dwelling, it says:
"A residential property that is no longer habitable as a dwelling, due to dereliction for example, would not be residential property, on the basis that it is not suitable for use as a dwelling.
"However, there is a clear distinction between derelict property and a dwelling that is essentially habitable, but in need of modernisation, renovation or repair, which can be addressed without materially changing the structural nature of the property."
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 granted with a term of seven years or more.
However, as many timeshare deals are contractual agreements to occupy a property that is owned by another person, this will not usually be the case.
Q. What about other homes specifically designed for holiday use?
A. HMRC used to say that holiday homes – even if they are furnished holiday lets or even if there are planning restrictions limiting their use to part of the year – will be treated the same way as any other additional property purchases. And this assertion remains in its Manual.
However, HMRC is shortly expected to change this guidance to be more consistent with other more recent guidance it published in October 2019 where it says: "if restrictions of planning exist whereby chalet use is not permitted out of season or where only short stays are permitted, then this would be a factor indicating that the chalet will also not be ‘suitable for use’ as a dwelling.”
Q. What about foreign buyers?
A. On February 11, 2019 a consultation paper was published about making non-UK residents who are buying property in England or Northern Ireland, liable for an extra 1% Stamp Duty Land Tax on top of existing rates.
The proposals were reinvigorated on 22 November, 2019 by the Conservative Party with this press release which recommends the new surcharge should be 3% above existing rates.
The proposals state that individuals will be treated as non-UK residents (and therefore liable for the additional tax) if they have spent fewer than 183 midnights in the UK in the 12 months leading up to the date of the purchase completing.
If the extra stamp duty is due, it can be reclaimed if the purchaser goes onto spend 183 midnights or more in the UK in the 12 months following the purchase.
For purchases made through trusts and companies, the proposals are much more complex.
The earlier consultation, which you can read here, closed on May 6, 2019.
Q. Are there any exemptions?
A. The most important exemption – which is often misunderstood or even overlooked – is related to rules around the replacement of an only or main dwelling.
You can read more about this above or by heading to John Shallcross' article, The all-important rule that could see you escape the higher rates of Stamp Duty.
But there are more straightforward exceptions too.
- You won’t pay the 3% Stamp Duty Land Tax surcharge on additional homes that cost less than £40,000, nor 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 with the shop below for example) will be exempt from the higher rates too. But if you already own a mixed-use property (which includes a self-contained dwelling) and want to buy an additional property, it will count against you for the higher rates. (Here is some guidance from HMRC published in June, 2019 on what constitutes 'mixed use'.)
- Social landlords and charities won't be liable for the 3% loading, if the usual Stamp Duty Land Tax reliefs apply to them.
Q. Can I just omit to mention to my solicitor about the fact I already have an interest in another property?
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. What's changed in Wales?
A. In April 2018, Land Transaction Tax replaced Stamp Duty Land Tax in Wales. The rules are broadly similar to England's but, when it comes to the 3% surcharge, there are some significant differences.
These include the way the exception works around the replacement of a main or only residence. And there is no first time buyers’ relief under Land Transaction Tax.
Q. What official guidance is there?
A. HMRC issued a Guidance Note on the day of the 2016 Budget. But it was criticised as being misleading in places and it failed to deal with many common scenarios. So, HMRC issued a revised Guidance Note in November the same year.
Most of the guidance was moved at the end of March 2018 into the Manual with some updates, in particular to take account of the changes made with effect from 22 November 2017.
The guidance has been updated a number of times since, the latest significant update in August 2018.
If you still need to refer to the November 2016 Guidance Note you will find it archived here**.** It has a Q&A section (not carried over into the Manual) that explains the replacement exception more clearly with examples.
The briefer online guidance was updated on 24 March 2017, when John wrote this commentary on it. HMRC consulted on fresh guidance to replace this and published it in August 2018. John Shallcross' subsequent commentary can be found here.
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: Stamp Duty Land Tax, HM Revenue and Customs, BX9 1HD, United Kingdom.
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 below: Your entry will not be visible immediately as comments are subject to moderation, but they'll usually be posted by the next working day. Please 'vote up' comments that you find particularly helpful. And be aware that responses do not constitute financial or legal advice.
John has produced this prototype online tool taking readers through the issues. It has limitations but please try it and add a comment. No responsibility is accepted to those using the tool.
Do some research: HMRC’s guidance of November 2016 was moved (and slightly updated) in March 2018. You will find the updated version in the Manual starting here. If you need to look at the November 2016 guidance note (PDF) you will find it here**.**
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