When purchasing a second home, you will likely find yourself looking into a variety of different taxes depending on your circumstances. Inheritance tax, Capital Gains Tax and Income tax are just a few that you may find yourself facing. But what about stamp duty? And the extra 3% surcharge that it can bring with it?
In this blog post, we will be taking a deep dive into the world of stamp duty surcharge, looking at what it is, how it affects homeowners, and what it means for you.
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When you buy a second property, you will more than likely be subject to a higher rate of stamp duty land tax (SDLT). This rate applies to all property purchases including residential properties, buy-to-let and holiday homes.
It is an additional 3% surcharge on regular stamp duty rates, as shown below:
|Band||Regular residential SDLT rates||Residential rates with an extra 3%|
|£0 - £250K||0%||3%|
|£250K - £925K||5%||8%|
|£925K - £1.5m||10%||13%|
The stamp duty land tax surcharge will apply to anyone who has purchased an additional property for £40,000 or more. This is regardless of whether it is a buy-to-let property, holiday home or a main residence for you to live in.
You will also have to pay the 3 % stamp duty surcharge if you own a share worth more than £40,000 in another property. This will not just apply to properties in the UK. If you are the owner of a 40% share of a £250,000 chalet in France but a first-time buyer in the UK, you may find yourself facing extra tax.
When a property is purchased in England and Northern Ireland, these higher rates will be applied. They are also applied under different legislation as Land and Buildings Transaction Tax in Scotland and as Land Transaction Tax in Wales.
The 3% stamp duty surcharge on second homes was introduced on 1 April 2016, meaning that people who purchased residential properties in England and Northern Ireland were charged a higher rate of SDLT.
Should a purchaser own two or more properties at the end of a transaction and not have found a new main residence, then a higher rate will apply to them.
Regular stamp duty tax is charged on a tiered basis. This means that you will only pay higher rates on the slice above any threshold, the same way that income tax works. However, the 3% surcharge still works as a slab tax, meaning that the 3% loading applies to the entire purchase price of the property.
To put this into context, if you are buying a second home for £300,000 then the extra 3% will add a sum of £9,000 onto the £2,500 regular stamp duty bill, bringing the total to a whopping £11,500 extra to pay.
There are a couple of exemptions to SDLT surcharge. You will not have to worry about the higher rate of SDLT if you are purchasing a property that you intend to live in as your main residence, as long as you have sold your existing property before you buy your new home (or on the same day).
But, you will have to pay a higher rate of stamp duty land tax when purchasing a new home if you have not sold your original main residence. However, if you decide to give away or put your previous main home up for sale within 3 years of buying your new property, then you will be able to apply for a refund of the higher rate of SDLT rate from HMRC.
In order to secure this refund, it is important that you meet the following criteria:
You will also be exempt from paying the surcharge if you have purchased a property for under £40,000, a houseboat, mobile home, or caravan. Small shares in recently inherited properties will also not be charged.
If you wish to apply for a refund, you can either do this online or complete one of HMRC's repayment request forms which you will need to print off and post to HMRC.
HMRC has now extended the time limit for applications and will accept refunds 12 months from the date of the sale, however, they will refuse late applications.
The HMRC aims to process all of its refunds within 15 working days of receiving the application. Whilst this may be the aim, refunds from HMRC have been known to take as long as 55 working days. If your refund application has been successful, then you will receive your refund payment via BACs transfer.
No, it is not possible to escape the surcharge by setting up a limited company to purchase property. the surcharge is due on almost all purchases made through limited companies due to the fact there are very few properties available below the threshold.
If you already have a limited company then the surcharge applies when purchasing property through it. Should you then transfer the property into a limited company without paying the purchase price, then its market value will typically be applied for stamp duty purposes.
If you already own properties through this company, they will not 'count against you' if you are buying a property for yourself.
In order for your property to be classed as a main residence, it needs to be the home you live in, not just one you own. Exactly which property is your main residence will be judged by HMRC.
As a result, it is not enough to simply occupy the property. You must be able to demonstrate a degree of permanence and expectation of continuity in order to have it classed as your main residence.
Unlike with Capital Gains Tax, you cannot choose which is your main residence, you will need to be able to prove it is where you are registered to vote, signed up to local doctors, dentists etc, and it is where you spend most nights.
If you purchase a new property whilst keeping your current property, you will need to pay the 3% SDLT surcharge on the new property. However, if you sell your old property within 36 months of completing the purchase of your new property then you will be able to get a full refund of the 3 % surcharge.
This will apply to the sale or any other kind of disposal of the property that has been your main residence at some point during the 36 months leading up to the purchase. To put it simply, you will not have to move straight out of one property and into the next. As long as the property is classed as your 'residence' how long you have lived there should not matter.
If you already own a property and go to buy a second property, then the 3% surcharge will more than likely apply to the transaction, even if the other buyer does not own any property. If you are married or in a civil partnership and one person owns a property and the other does not, this will also still apply, as you will be treated as joint buyers, even if you are not.
If a property has been inherited, then usually the surcharge does not apply. However, if you have inherited a property and then go on to buy another property without first selling the inherited property then you may find yourself facing a surcharge.
There are a couple of exceptions to this rule. A small share (anything less than 50%) in a single property which has been inherited within three years prior to buying another property will not count against you when it comes to the surcharge.
Unless you are separated, your civil partner or spouse's property interests will also be considered during this.
SDLT is only counted on the 'chargeable consideration' (typically the purchase price), so a gift will often be free of stamp duty. If there is a mortgage attached to the property, then often a proportion of its value can be liable for tax. The same applies for the 3% surcharge.
Only ' dwellings ' are subject to the 3 SDLT charge. Even though more often than not a plot of land will be used for a home, it is not counted as a dwelling so the charge will not apply.
However, if construction work has started on the plot, but is not finished, it will count as a dwelling.
If you already own an empty plot of land and are purchasing an additional property, the plot will not count against you.
Starting from the 1st of April 2021, anyone purchasing residential property or leases who are not a resident of the UK will have to pay stamp duty at a rate that is 2% higher than the rate at which residents pay. This 2% is in addition to the 3% charge.
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