Stephanie McMahon

Head of Research

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Stephanie

There have been a number of stamp duty reforms in recent years and the possibility of more to come. In September, the Prime Minister announced she would consult on a additional stamp duty charge for individuals and companies who don’t pay tax in the UK.

The consultation is expected to be launched in January 2019 with a proposal for a 1% Stamp Duty surcharge for non-residents buying residential property in England and Northern Ireland.

This would be in addition to the 3% surcharge introduced in April 2016 that applies to anyone buying an additional residential property such as a second home or a buy-to-let (BTL).

In England and Northern Ireland, Stamp Duty normally applies on purchases of residential properties or land valued over £125,000. However, when buying a second home or a BTL property, Stamp Duty is now payable on all purchases over £40,000.

Rate bands for Stamp Duty are tiered depending on the cost of the house, with rates applying to the part of the property price within each band. Buyers of second homes and additional residential properties must pay an additional 3% in Stamp Duty on top of these standard rates.

For example, the Stamp Duty on a £350,000 house purchase would be calculated as follows (to the nearest pound):

• 0% on the first £125,000 = £0
• 2% of the purchase price in the £125,001-£250,000 bracket = £2,500
• 5% of the purchase price in the £250,001-£925,000 bracket (i.e. £100,000 in this case) = £5,000
  • Total Stamp Duty payable = £7,500

If, however, the £350,000 house was instead bought as a second home or a BTL property the Stamp Duty would be charged as follows (to the nearest pound):

• 3% on the first £125,000 = £3,750
• 5% of the purchase price in the £125,001-£250,000 bracket = £6,250
• 8% of the purchase price in the £250,001-£925,000 bracket = £8,000
  • Total Stamp Duty payable = £18,000

Stamp Duty does not apply across the whole of the UK. Property buyers in Scotland pay Land and Buildings Transaction Tax (LBTT), while in Wales it’s called Land Transaction Tax (LTT). Although the base rates and price bands for these taxes differ from SDLT, a 3% surcharge still applies to additional residential properties bought in Scotland and Wales.

Will higher Stamp Duty rates apply to your purchase?

In a nutshell, if you, your spouse or civil partner already owns a residential property anywhere in the world and you intend to buy a second home or BTL residential property, you will have to pay the 3% surcharge.

The increased rates also apply if you’re buying a house for your children, if you will be named on the deeds and you already own another property.

If you are buying a home to replace your main residence, you will not need to pay the surcharge. That being said, if you complete the purchase of your new home before the sale of your previous house, you’ll have to pay the extra stamp duty because you’ll be classed (albeit temporarily) as the owner of two residential properties. In this case, you can apply for a full refund once you sell your previous home, so long as it’s within 3 years of the purchase of your new house.

You used to have to apply for your stamp duty refund within 3 months of the sale or your old home if it was sold later than 12 months from the filing of your original stamp duty return. However, if you sold your previous main residence on or after 29 October 2018, you have up to 12 months to file your refund request.

Are there any exceptions?

Although properties owned by, or with, a spouse are counted in the reckoning, you will be exempt from paying higher Stamp Duty on a second house purchase if you and your spouse are permanently separated, even if you’re not divorced.

There are also a few exemptions regarding the type of property purchased, that could be useful for potential BTL landlords. The extra rate doesn’t apply to caravans, mobile homes or houseboats. It also doesn’t apply when buying commercial or mixed-use properties, for instance a shop with a flat above.

Although the charges apply to both freehold and leasehold additional properties, you will be exempt if your lease is for 7 years or less (from the date it was granted), or if the lease is owned by someone else and it has more than 21 years left.

A loophole for buy-to-let landlords

Technically, if a BTL landlord is replacing their main residence, they won’t have to pay the surcharge on that purchase even if they already own several rental properties.

But these rules are tightening somewhat. From November 26th 2018, buyers must have lived in and disposed of their previous main residence during the 3-year grace period before purchasing their new main residence. The keyword here is ‘disposed’. The disposal of your main residence doesn’t necessarily mean a sale; it could be transferred to another party as a gift or as part of a divorce settlement.