3% Surcharge On Stamp Duty Land Tax And The 3-Year Rules

The higher rate of stamp duty was designed to be applicable to additional residential property purchases, such as buy-to-lets and second homes. However, the surcharge’s design is far more complex than expected. One area that causes issues are the 3-year conditions that are associated with transactions involving the buyer’s replacement of their main residence and that are exempt from the surcharge liability. 

This exception saves purchasers from payment of this surcharge in several situations where the buyer has another property. These technical rules seem to often have arbitrary results that are difficult to find justification for in terms of policy. Even HMRC struggles with their appropriate application in some instances, so it is not too surprising that so many people find them complicated to grasp. 

Here, we take a closer look at the basics of stamp duty, the 3-year conditions and whether or not the surcharge may be reclaimed at a later date. 

Stamp Duty (SDLT) – An Overview

When purchasing a residential property, SDLT (Stamp Duty Land Tax) is usually paid on an increasing portion of the price of the property if it is worth more than £250,000. How much stamp duty is paid depends on three key factors: 

1. The date the property was purchased
2. The amount paid for the property
3. Whether or not you are eligible to receive an exemption or relief.

If you only own a single residential property, stamp duty is paid at the following rates: 

• Properties worth under £250,000 – zero SDLT
• Properties worth between £250,001 and £925,000 – 5% SDLT on the next £657000 or portion between £250,001 and £925,000
• Properties worth £925,001 - £1.5 million – 10% SDLT on the next £575000 or portion between £925,001 and £1.5 million
• Properties worth over £1.5 million – 12% SDLT on the remainder or portion over £1.5 million

For anyone purchasing their first property, a relief can be claimed which allows no SDLT to be paid on properties up to the value of £425,000, with 5% SDLT owed on the portion between £425,001 and £625,000. For properties over £625,000 no relief can be claimed.

If purchasing a residential property will leave you with more than a single residential home you will typically need to pay a surcharge of 3% in excess of the SDLT rate although no surcharge is applicable if you are purchasing a property to replace your primary residence which has been sold already. If the primary residence is not sold on the date of completion of the new property purchase, the higher rate must be paid, and this is where the 3 year rule comes into play. 

Recovering The Surcharge If An Old Property Has Been Sold After Purchasing A New One

In this case, somebody sells their former property after they purchase their new home with the intention of that new property being their main or only residence (although the purchaser may also own other homes). 

Even if the purchaser owns multiple properties, when the day the transaction of purchasing the new property is made comes to an end, the purchaser owns at least two dwellings and, therefore, the surcharge of 3% will be due on that new property purchase. But can that surcharge be reclaimed when the old property is sold at a later date?

To be able to reclaim this surcharge, the following conditions must be met: 

• When the new property’s purchase completes, the buyer must be intending to reside in that property as their main or only residence.
• Within 3 years of the purchase of the new property, the purchaser must sell or dispose of their old property. Neither the purchaser nor their civil partner or spouse may retain the old property or any share of it.
• Within the 3 years before the new property’s purchase, the purchaser had resided in their old property as their main or only residence for some or all of the time.

The purchaser’s old property may be located anywhere worldwide subject to it having been owned freehold or on lease for more than 7 years (or the local jurisdiction equivalent).

Recovering The Surcharge When The Old Property Is Sold Before Or Simultaneously With The New Property

This situation can cause a lot of confusion but two 3-year tests exist to determine whether the surcharge can be recovered:

• When completing the new property’s purchase, the buyer was intending to reside in that new property as their main or only residence.
• The major interest in the sold dwelling was disposed of either earlier or on the date of the new property’s purchase and no major interest was held in that sold dwelling immediately following the disposal by the buyer, their civil partner, or spouse. The disposal may have taken place no earlier than 3 years before the purchase date of the new property.
• Before completing the new property’s purchase, the purchaser must have resided in the dwelling that was sold as their main or only residence at some time within the 3 years prior to sale, and at no time after or on the date of disposing of the sold property must their buyer or their civil partner or spouse acquire any major interest in a dwelling while intending to reside there as the purchaser’s main or only residence.

The Exception Applies Only To Individuals

The above exception applies only to purchases made by individuals and not to those made by housing associations, companies, or anybody purchasing a property in conjunction with a university, church, or other institution. 

How Can The Surcharge Be Reclaimed?

If you are eligible for a refund of your 3% surcharge, you must send a letter to HMRC explaining why your previous property’s sale took over 3 years to complete. The letter must include:

• Your own details
• The primary purchaser’s details if different
• All details relating to the circumstances that prevented your old property from being sold.
• Information about the property on which the surcharge was paid such as the purchase date, the address, and the UTR of the SDLT payment.
• Details of your former main residence – its address, sale date, and SDLT UTR.
• How much surcharge was paid.
• How much tax you want repaid to you.
• The sort code and account number of the individual who will receive the payment.