Following on from the government’s Autumn Review in November 2015, the Government announced a higher rate of SDLT on purchases of additional residential properties. The changes affect purchases which complete on or after 1 April 2016, however it does not affect anyone who owned more than one residential property prior to 1 April 2016. We have provided a guide to help our clients understand when the new stamp duty rules apply to additional property purchases.

What is the 3% surcharge?

The surcharge is an additional 3% Stamp Duty Land Tax on additional residential properties. Therefore, the higher rates will never apply where, at the end of the transaction, an individual purchaser only owns one residential property (or, in the case of joint purchasers, that at the end of the day of the transaction each one of the joint purchasers only own one residential property).

When will the surcharge apply?

The additional SDLT will apply when a second residential property is purchased in addition to the purchaser’s main residence. The most common scenario in which purchasers will pay the higher rates is where they are purchasing a buy-to-let or second home in addition to their main home. The surcharge is applied whether an individual or a company is purchasing the additional residential property. A purchaser of a non-residential property will never pay the higher rates of SDLT, even if it is later converted into residential property. Non-residential property includes commercial property (such as shops or offices), agricultural land, bare land (even where that land may subsequently be used for residential purposes), any other land or property which is not used as a residence or mixed use property (one with both residential and non-residential elements).

When does it come into force?

The surcharge will only apply to purchases which complete on or after 1 April 2016. If contracts are exchanged after 25 November 2015 then the higher rates will apply if the purchase is completed on or after 1 April 2016. However, if contracts were exchanged on or before 25 November 2015 but not completed until on or after 1 April 2016, the higher rates will not apply.

What does the new rate equate to?

The higher rates will be 3 percentage points above the current SDLT residential rates. They will be charged on the portion of the value of the property that falls into each band.

For example, an additional residential property is purchased for £200,000.  SDLT is calculated as follows:

3% on the first £125,000 = £3,750

5% on the remaining £75,000 (the portion between £125,000 and £200,000) = £3,750

The total SDLT due is therefore: £3,750 + £3,750 = £7,500

This is an increase of £5,000 from the previous rate which would have resulted in a liability of £1,500.

What if there is a delay in replacing a main residence?

Sometimes there is a delay between your sale and purchase which means that for a period of time you will effectively own two residential properties.  In this scenario, HMRC have created a flow chart to help establish whether the higher rate of SDLT will apply.

If the sale of your old residence is not completed at the same time as your new purchase, you will be liable to pay the surcharge of 3%.  However, the government does not want to disadvantage people in those circumstances so to ensure fairness, they have introduced a refund mechanism for those who sell their previous main residence within 18 months of the purchase of the new main residence.

This refund will be on the difference between the amount of SDLT paid under the higher rates and the amount of SDLT that would have been due under the normal residential SDLT rates.  This will mean that, after the refund, the purchaser will have paid the normal residential rates of SDLT.

Are there any exemptions?

The 3% Stamp Duty surcharge does not apply to second homes that cost less than £40,000, caravans, mobile homes and houseboats.  However, properties bought as furnished holiday lets will be treated as an additional property and subject to the surcharge.

Work related accommodation which is provided and owned by an employer is exempt.  The individual will be able to purchase one property without the higher rates applying (even if it will not be used as a main residence) as at the end of the day they will only own one property.

Timeshare agreements are not chargeable for SDLT purposes and therefore the higher rates will not apply to purchases of timeshares.

Stamp Duty is not payable on properties that are inherited, so the 3% surcharge will not apply.  However, if you inherit a property and then go on to purchase a second home without selling it, you will have to pay the additional SDLT rate.

SDLT will not apply to properties purchased outside England, Wales and Northern Ireland, however, they may be liable for any property transactions tax in the jurisdiction it is purchased.

What about buying property jointly where my partner already owns a property?

Married couples and civil partners who own one property at the end of the day of a transaction will not pay the higher rates of SDLT.  However, if either of them owns more than one residential property, they may pay the higher rates when purchasing another property.  This is because the government treat married couples and civil partners living together as one unit unless they are separated by court order or agreement.  In this case, couple’s main residence will need to be determined by the facts.

A transaction is exempt from SDLT when a couple divorce, separate or end their civil partnership and either they agree to split their property and land between them by agreement or under the terms of a court order.  Although a party to a separation may own two residential properties, they are replacing their main residence and will not be liable to the higher rates of SDLT.

What if I want to purchase a property for children to live in?

Whether the higher rates of SDLT will apply will depend on the structure of any transaction, and in particular who owns the property purchased.  

For example, if a father wants to jointly purchase a property with his daughter, he will own more than one residential property and he has not replaced his main residence, so the higher rates will apply.  However, if he gives his daughter money towards a deposit but will not jointly own the property with her, the higher rate will not apply as at the end of the day as the daughter and father will still own one residential property.

If you have any questions on the stamp duty changes or would like to discuss a proposed property purchase, please contact Helen Rowe or Louise Keeble in our residential property department on 01293 596964.