The new second home stamp duty land tax rates came into effect on April 1st 2016 and changed how the amount of tax those who are purchasing a buy to let property or a second home will pay. At a basic level, this change increases stamp duty payments by 3% and is applicable on any transaction over £40,000. This means it is applicable even on a purchase price which falls below the normal £125,000 stamp duty land tax threshold which applies to a first home.
The new higher rate of tax is part of the Government’s commitment to supporting home ownership and applies to most purchases of additional residential properties in England, Wales and Northern Ireland where individual purchasers own two or more residential properties and are not replacing their main residence and purchases of residential properties by companies.
What Are The Rates?
If you are purchasing a property that will mean you end up owning more than one property then you will be eligible to pay the additional 3% stamp duty tax.
If you are replacing your main residence, then you won’t pay the extra 3% tax if the property you are buying is replacing your main residence which has already been sold either prior to or simultaneously with completion of the purchase.
If there is a delay between completing the new purchase and selling the main residence, then you will still be required to pay the higher tax rate as at the time of completion you will own two properties.
However, you will be able to apply for a refund within 36 months of completion if you sell your previous main residence. The refund will be on the difference between the amount of tax paid under the higher rate and the amount of tax that would have been due under the normal residential rates.
The higher rates will be charged on the portion of the value of the property that falls into each band.
Currently all transactions whereby the purchase price is under £40,000 do not require a tax return to be filed with HMRC.
How Do I Check a Properties Rates?
Quite simply, if you already own another property and you plan on buying a second home or buy to let property then you will be liable to pay the higher rate stamp duty. This applies even in the case of joint purchasers where one party already owns a property but the other does not – even if only one of the buyers already owns a property, the higher rates of tax will apply.
Residential properties, including a tenancy or lease of a residential property, worth less than £40,000 will not be taken into account when determining if an additional residential property is being purchased.
The higher rates only apply to purchases of additional residential property which completed after 1st April 2016. If contracts were exchanged after 25th November 2015 then the higher rates will apply if the purchase is completed after 1st April 2016. However, if contracts were exchanged on or before 25th November 2015 but not completed until on or after 1st April 2016 the higher rates will not apply.
The ‘Main Residence’ Rule
If at the end of the purchase transaction an individual purchaser owns two or more residential properties, whether the purchaser pays the higher rate or not will depend on whether they are replacing their main residence.
Where an individual has more than one property, in most cases it will be clear which one is the main residence, for example where an individual owns two properties, one which they live in and one which they rent out. HMRC has stated that it will take into account a number of factors when considering whether a given property is an individual’s main residence. These include:
- Where the individual and their family spends their time
- If the individual has children and where they attend school
- At which residence the individual is registered to vote
- Where the individual works
- The location and degree of furnishing and location of moveable possessions
- The correspondence and registration addresses given to various organisations.
It is understood that HMRC is providing guidance on how purchasers can determine whether the disposal of a property can be considered as a main residence.
Stamp Duty Exemptions
The new rates will apply in all scenarios whereby a second property is being purchased and will not be replacing the buyer’s ‘main residence’. Those individuals that will particularly be captured by the new stamp duty charges include parents who are assisting their children to buy a property by going on the mortgage and title with them.
Married couples and civil partners are treated by HMRC as one ‘unit’, meaning that if one spouse owns a property and the other doesn’t if a property is purchased jointly, without the other property being sold, second home stamp duty will apply. However, married couples who have separated permanently but have not yet formally divorced will not be treated as one ‘unit’, and thus will not be subject to the higher rates of tax where one spouse already owns a property but the other does not.
No tax is payable on purchases under £40,000 or payable on homes which are of a semi-permanent nature such as caravans, mobile homes and houseboats.
The legislation does not make specific provision for homes of a semi-permanent nature, and the land on which they stand, will depend on the nature of the interest which they represent. Other exemptions include when a beneficiary inherits a property.
The new law hasn’t been favoured by all but it should help to improve the property market for those trying to get on the property ladder by easing the amount of buy to let purchasers, but if you are choosing to purchase a second home then it could prove even more costly.