Second Homes – Stamp Duty Land Tax Rate Increase.
We reported back at the end of last year the Chancellor’s announcement as part of his Autumn Statement that a higher rate of stamp duty was to be introduced for second residential properties. The increased rate of stamp duty land tax (SDLT) of 3% now applies to purchases of “additional residential properties” from 1 April 2016. The measure is targeted at people buying second homes and buy to let properties. Following the November announcement, the details of the new rules were subject to consultation, the results of which were announced as part of the March Budget Statement with draft legislation yet to be released. The increase in SDLT is part of the Chancellor’s measures to try and rebalance the residential property market, with the aim of reducing property prices for first time buyers. We are not sure the increase in SDLT had the required effect initially, as both lenders and solicitors reported an increase in workloads, as buyers rushed to beat the 1st April deadline. The consultation period was ridiculously short (28 December 2015 to 1 February 2016) and the paper was not well drafted, however just over 200 organisations made representations. The results of the consultation, which will form the basis of the new legislation did not significantly change anything which we knew from the November announcement, however it has thrown up some surprising situations which will be caught by the new rules. We have summarised the new rules below.
We have summarised the new rules below.
Who has to pay the new increased SDLT Rate?
Anyone who is buying additional residential properties in the UK, including Scotland. The rules include all types of second residential property, for example a holiday home or buy-to-let.
The new rates will apply even if the home you already own (or part-own) is overseas. So, if you have an overseas holiday home or own a home overseas having moved to the UK to work and are buying your first home in the UK, you are still caught by the increase.
How is the tax charged?
Regular SDLT is charged on a tiered basis (so you only pay the higher rate on the slice above any threshold – the same as income tax), following an announcement in the March 2015 Budget. The 3% surcharge will still effectively work as a slab tax, the 3% loading will apply to the entire purchase price of the property. Therefore, the following SDLT rates will apply to each “slice” of the property price on buy-to-let properties and second homes:
- £0 to £125,000: 3% (though no SDLT is payable on properties priced up to £40,000);
- £125,001 to £250,000: 5%;
- £250,001 to £925,000:
- 8%;£925,001 to £1.5 million:13%;
- Over £1.5 million: 15%.
For example, if you are buying a second home with a purchase price of £300,000, the extra 3% SDLT would equate to £9,000 (3% of the entire price). This is in addition to the £5,000 regular SDLT charge on a property of this value, making the total payable £14,000.
It is worth noting that if you pay Capital Gains Tax on the sale profits of an additional home, you can offset the SDLT cost against your bill.
What if the home I am buying will be my main residence?
If the home you are buying directly replaces your main residence, you will not be liable for the 3% surcharge, even if you own an additional home/s at the same time. This example is straight from the Government’s consultation document:
“A owns both a main residence and a second home. She sells her main residence and purchases a new one. Although she has two properties at the end of the day of the transaction, she has replaced her main residence so the higher rates will not apply.”
But the Treasury says that moving out of rented accommodation does NOTconstitute a main residence. Your last residence will need to be disposed of to escape the 3%. Gifting a property however, does constitute disposing of your main residence. Consider the example of a couple deciding to move in together, one owning an existing residential property which they rent out after moving into a rented property with their new partner. If the couple thereafter decide to buy a new home together, they would be caught by the new enhanced rate, as one party to the couple has a property which had formerly been their main residence.
What if I need to buy another main residence before I can sell my last one?
If you move out of your main residence (Home A) but keep it and buy another main residence (Home B), you will have to pay the additional 3% SDLT initially. However, so long as you sell Home A within 36 months (increased from the 18 months set out in the November 2016 Budget proposal) of completing on the purchase of Home B, HMRC will make a full refund. This still creates a cash flow issue, as the 3% has to be paid at the time of the acquisition.
What if I sell my main residence but I’m not able to buy another one straight away?
In some cases, (for example, if you are moving back to the UK after living abroad), you may have to sell your main residence but move into a ‘stop gap’ before you can buy a new one. In this case, you will be offered a ‘grace period’ of 36 months (increased from the 18 months suggested in the November 2016 Budget) during which time the purchase of your next main residence will not be subject to the 3% surcharge.
What if I already own a property, but I’m buying jointly with someone who doesn’t?
Unfortunately even if just one of you already owns a home, when you are buying another one together, the 3% SDLT charge will apply on the whole purchase price.
For couples not currently living together, it may be possible to get around this by putting the new home solely in the name of the partner who doesn’t already own (if you can satisfy the lender’s affordability criteria in just one person’s name) and if married, the property can be transferred to the other spouse tax free. (If the couple are not married or in a civil partnership, then if the transfer doesn’t take place shortly after the acquisition, a capital gains tax charge could arise).
Getting divorced but name is still on the deeds of my family home?
If you are separated or getting divorced and want to buy a new home to live in, but your name is still on the deeds of the family home (which is not being sold), this will constitute buying an additional property which means the 3% will apply.
After the November 2016 Budget, the Government confirmed that married couples who are living separately in circumstances that are likely to become permanent will not be treated as one unit for the purposes of the 3% surcharge. In other words, if you are buying a home that only incurs the 3% additional charge on the basis of your legal spouse’s situation, you won’t have to pay it.
Can I avoid the surcharge by setting up a limited company?
Many landlords are changing to a limited company structure to escape the mortgage interest changes being phased in from April 2017, as a company is not within the proposed measures. However operating or owning your properties via a limited company will not escape the surcharge and can cause other tax issues. It was thought that an exemption would be made as, in its initial consultation, the Government had earmarked ‘bulk buyers’ of 15 or more residential homes for an exclusion as they were deemed to be ‘contributing towards new housing supply. However, following the consultation process the Government has confirmed there will be no exemption for any individual or entity which acquires property (other than explained below).
Are there any exemptions?
The following won’t bear the 3% SDLT surcharge:
- social landlords and charities;
- second homes that cost less than £40,000;
- caravans, mobile homes; and
No SDLT is payable on properties that are inherited, so the 3% premium will not be relevant. However, if you have inherited a property and go onto purchase a second home without selling it, you will be hit with the additional rate.
The consultation provided that if an individual only owned a small share (50% or less) in a single property which had been inherited within the 36 months prior to buying another home (which would otherwise attract the 3% surcharge) there will no additional SDLT to pay.
The legislation is still to be written but, based on the results of the consultation, the impact is now pretty much known. For landlords and those acquiring second homes, it is pretty much the case that the 3% additional charge will need to be factored into any purchase. For those who own a former home and are looking to acquire a property with a new partner, or are getting divorced, advice should be taken to see if any steps can be taken to mitigate the additional 3% duty.