Nobody wants to fork out an extra 3% in Stamp Duty Land Tax when buying an additional home. And so-called 'replacement of an only or main residence' rules could be a way out of it.

Updated 22 NOVEMBER, 2017

The comments section of Zoopla’s Q&A on 3% Stamp Duty Land Tax (SDLT) has many questions from individuals who are buying a house or flat to live in, but who have interests in other property.

An issue that frequently causes confusion is whether the surcharge can be avoided on the basis that you are ‘replacing an only or main residence’ with your new purchase. If you are doing this, you will escape from the higher rates of SDLT – which can save you thousands of pounds.

But the replacement of only or main residence rules are tricky to understand with various conditions which depend on the circumstances.

It is important that:

1. The buyer (or sometimes a spouse) previously owned a home which was their only or main residence, meaning they had actually lived there

2. This home has been sold or otherwise disposed of or at least a share in it disposed of (more detail on this below)

3. The new property is intended as an only or main residence (ie, the buyer must intend to live there)

A hot topic for debate here is whether it's enough to dispose of just a part of an interest in the previous home – something which would support the current legislation that makes reference to a 'major interest'.

Confusingly however, HMRC has indicated that the whole interest would need to be disposed of to satisfy this condition. And indeed, this is the case with the legislation that's already been passed for the Welsh Land Transaction Tax which comes into effect on 1 April 2018.

IMPORTANT: Amendments made in the in 2017 Budget tackle this issue. Now, to be able to rely on a disposal of a previous home, the person and their spouse or civil partner, must dispose of all their interest in in.

Another issue is around how spouses and civil partners are dealt with. HMRC's brief guidance treats them as a single unit and, while this is the case in some contexts of the surcharge, it's contradicted by the legislation itself.

IMPORTANT: Amendments in the 2017 Budget provide an excpetion from the surcharge for some transactions between spouses

Ultimately however, where there is conflict, the legislation and not the guidance should be applied.

Buying a home, having previously sold

But it doesn't stop here.

There is particular confusion where you have sold a main residence in the past and are preparing to buy another one. The magic number here will (but only in the fullness of time) be three years – and this is why.

With effect for purchases completing after 26 November 2018, the legislation imposes a three-year time limit by which the purchase of your next only or main residence should be completed following the sale of a former only or main residence, if you are to escape the 3% surcharge.

Additionally, the former residence must have been your only or main home (you must have lived there) at some point during the three years leading up to the purchase.

Semi-detached house in Bedford

HOWEVER, as things stand now (for purchases completing up to 26 November 2018) these three-year rules do not apply to this kind of case (where the sale happens at the same time or before the purchase).

In other words, you could have sold your main residence many years ago, and not be liable for the 3% surcharge when buying another one.  

Although the position can be complicated (particularly if you are married or in a civil partnership) the exception from the 3% surcharge for a replacement of only or main residence can come to the rescue and save you thousands.

(The HMRC Guidance Note of 16 March, 2016 was confusing on the replacement rules. HMRC issued revised guidance to replace this on 29 November, 2016. The rules remain complicated but the new guidance is less confusing than the original!)

To demonstrate how the three-year rules work in more detail, we have adapted some real-life scenarios from the comments section of Zoopla’s SDLT Surcharge Q&A and provided answers to each.

Scenario 1: Married couple returning from abroad

Question: My wife and I left England six years ago to work abroad. Before we left, we sold our home which had been our main residence up until that point, having lived in it for many years. We have lived in overseas accommodation provided by our employers since. In the next few months, we want to return to England and buy a new main residence, which we'll move into straight away. However, we each have other property interests and have been told that we will have to pay the 3% SDLT surcharge. Is this right?

Answer: Some of the original HMRC guidance suggested that you cannot rely on the replacement of only or main residence exception to escape the 3% surcharge here because you sold your previous home more than three years ago. 

However, the relevant three-year rules do not apply to purchases completing by 26 November 2018. So you should escape the surcharge if you buy a new house in England intending it to be your only or main home. The new guidance is clearer on this point.

Flats at the Jam Factory in London

Scenario 2: Unmarried couple buying a home together

Question: My girlfriend and I are about to buy our first house together for us to live in as our only home. She has no other property interests, but I have several properties that I let out. I have been living in rented accommodation for the last four years since selling my previous home (which I had lived in up until then). Will we be hit with the surcharge because of my other property interests?

Answer: So long as you buy your property on or before 26 November 2018, you should not have to pay the surcharge. This is because the relevant ‘three-year rules’ (which state you should have sold a previous main residence within the three years prior to the new purchase) only start to apply from that date. Up until then, there is no time limit, so the replacement of only or main residence exception should apply to you, despite the fact your sale was four years ago.

Scenario 3: About to get married and buy home together

Question: I am getting married in the next few weeks, then my new husband and I will buy our first home together and move in. It will be our only residence. We each have a number of let properties. He has just sold the house he has been living in for many years, but I plan to keep the house that I lived in until last year and continue to rent it out for at least another two years. Do we have to pay the surcharge on the new house?

Answer: Yes. Because you were not married to each other when your intended sold his house, you cannot rely on his sale to get the benefit of the replacement of only or main residence exception.  It sounds as if you might sell what used to be your only home within three years of the purchase of your first home together. You might then be able to claim the surcharge back.

The three-year rules do apply in this scenario where you buy before you sell. So, as well as selling within three years of the purchase, you would also need your upcoming purchase to be within three years of you last living in what had been your main home.

Terraced house in Saltburn-By-The-Sea

Scenario 4: Keeping the old house for a while

Question: I have retained what used to be my only residence (I lived in it for many years) but have let it out for the last seven years while living in job related accommodation. I am about to complete on the purchase a new house and move straight in (I will live in it as my only residence) but want to retain the old one until the present tenant is ready to leave, which he says will be in about a year.

Is the position that I have to pay the surcharge, but can reclaim it if I sell what was my only home within three years of the purchase of the house I am about to buy?

Answer: Yes, you have to pay the surcharge. But no, you will not be able to reclaim it. Because your sale will follow the purchase, the three-year rules already apply to this scenario. You have not lived in the old house at any time in the last three years up to the purchase. So you will not be able to reclaim the surcharge, even if you sell the old house within the next three years.

Scenario 5: Separated but not divorced

Question: I am separated from my wife, but we are not divorced. The house we used to live in together has been sold. She has bought a flat to live in using her share of the proceeds. I am about to I buy a new home to live in as my only residence, but I own other properties. Can I use the exception for replacement of only or main residence to escape the surcharge?

Answer: Yes. You can use the exception even though your wife has already bought a new house after the matrimonial home was sold (so long as her new house was not intended as your only or main residence).

John Shallcross is a Stamp Duty Land Tax specialist in the Built Environment team at the national law firm Blake Morgan.  

You can find more detail on the replacement of only or main residence rules at the Blake Morgan website.

This article is intended for general information purposes only and does not constitute legal or professional advice. Advice should be sought before proceeding with any transaction. The same applies to postings made to the comments section of Zoopla's website.

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