Dive into the world of PAYE investigations. Uncover the facts, implications, and insights in this informative blog
The introduction of a 3% Stamp Duty Land Tax (SDLT) surcharge on 1 April 2016 has had a marked effect on the property market.
The new rules were meant to help combat the housing crisis by making it easier for first-time buyers and others moving home to access the housing market. The Government hoped that by making it more expensive for people to purchase buy-to-let properties and second homes that there would be more stock available for home occupiers. However, the increased SDLT surcharge has meant higher rents in many areas and there are still many investors and second home buyers in the market for residential properties.
The higher rate is 3% higher than the current SDLT rates and applies to the purchase of additional residential properties valued at over £40,000. If you are buying a second home, you will usually have to pay the higher rate of SDLT. This applies to purchases including holiday homes and buy-to-let investments.
The SDLT higher rates apply to purchases of additional residential properties in England and Northern Ireland. The surcharge does not apply to individuals who own only one residential property, irrespective of the intended use of the property.
In Scotland, there is a 4% surcharge of the Scottish Land and Buildings Transaction Tax (SLBTT) if an individual buys a second or subsequent residential property costing more than £40,000. In Wales, there is a Welsh Land Transaction Tax (WLTT) higher rate supplement of 3% on purchases of additional residential properties costing £40,000 or more.
The information below relates to SDLT in England and Northern Ireland and local advice should be sought if looking to purchase a second home in Scotland or Wales. However, across the UK the impact is the same and the surcharge makes investing in residential properties more expensive.
Avoiding the SDLT surcharge
Many buyers want to know if it is possible to avoid this SDLT surcharge. For most buyers, the answer is no and there are limited reliefs to avoid paying SDLT on a second home.
HMRC’s guidance lists the following scenarios where the SDLT surcharge does not apply.
- If you are transferring ownership (or part ownership) of a residential property to your spouse, the higher rates do not apply as long as no one else is involved in the transfer.
- If you want to increase the amount of a property that you already own, you do not have to pay the higher rates when all the following apply:
- you already own 25% or more
- the dwelling has been your only or main home for the previous 3 years
- if you’re extending a lease and your lease still has 21 years or more left to run.
Other exemptions and reliefs
You would also be exempt from SDLT (and the surcharge) on a second home if you find a second home worth less than £40,000.
The 3% higher rate of SDLT does not apply to “moveable” property, such as a caravan, houseboat or mobile home, or property where there is seven years or less left on the lease.
There is no SDLT on inherited properties. However, owning an inherited property will be relevant when determining if a purchaser is purchasing an additional residential property or not.
If you act as a guarantor or help with the deposit on a new property, then you are not classed as joint owner. This can help avoid the higher rate if you are for example, helping your children buy their first home.
The 3% higher rate applied to the dwelling element of mixed use buildings consisting of residential and non-residential properties after the rate was introduced in April 2016.
HMRC’s guidance on this issue was updated on 13 November 2020. The new guidance makes it clear that HMRC’s view has changed and that the 3% surcharge will not apply to the dwelling element. The guidance adds the caveat that the non-residential element of the transaction must not be negligible nor artificially contrived. For example, a shop with 2 flats above that was 1/3 commercial and 2/3 residential would have SDLT payable based on the commercial rate.
This change could allow affected purchasers to claim back any overpaid SDLT on mixed use, multiple dwelling transactions from HMRC within the legal time limits. Purchasers can also make a non-statutory clearance application in the event of uncertainty over a transaction.
Commercial property is subject to 'non-residential' rates of SDLT and the 3% SDLT surcharge. Investors looking to avoid the surcharge could therefore investigate whether the purchase of a commercial building would be an option. The non-residential SDLT rates are also lower than the rates for residential property reaching a maximum of 5% compared to 15% for residential.
This commercial rate of SDLT applies if you buy a non-residential property that you subsequently convert to a residential property, such as a doctor’s surgery on a residential road.
Multiple Dwellings Relief
This relief applies to property purchasers who buy more than one dwelling where a transaction or a number of linked transactions include freehold or leasehold interests in more than one dwelling. This is a valuable tax relief that is often unnoticed leaving a purchaser paying more SDLT than necessary.
The SDLT saving will be the difference between what the SDLT would have been on the total purchase price and the aggregate of the SDLT calculated for each individual dwelling. The minimum rate of tax under the relief is 1% of the amount paid for the dwellings.
If you think that you paid too much SDLT by failing to claim Multiple Dwellings Relief, you can claim back the overpaid duty within 12 months of the filing date of your original SDLT return by making an SDLT reclaim to HMRC.
There has also been some interesting case law where investors have argued that they are not liable for the 3% SDLT surcharge on the basis that a residential property was uninhabitable at the time of purchase. This could be for example because the home had no kitchen, bathroom, heating or even was missing a roof.
If you are buying a home that you intend to live in as your main home, then the higher rate of SDLT will not apply provided you have sold your existing home before you buy your new home (or on the same day).
However, if you have not yet sold your original main residence then you must pay the higher rate when buying a new home. If you sell or give away your previous main home within 3 years of buying your new home, you can apply for a refund of the higher SDLT rate as part of your SDLT bill.
The 3-year period may be extended if exceptional circumstances apply. This includes being prevented from selling the property owing to government guidance during the coronavirus pandemic or due to action taken by a public authority.
There are special rules that apply in the case of divorce. For example, in some cases, a divorcee may file for transfer of their marital home in court through the Property Placement Order. In this case, the divorcee handing over the home will not be subjected to the additional 3% SDLT rate if they purchase a new home. The situation is more complex without a Property Placement Order, but it may be possible to apply for a refund of SDLT.