In recent years there has been a significant overhaul to the Stamp Duty Land Tax (SDLT) regime for residential property in England and Northern Ireland.
As a result of these changes, SDLT has become a more complex area when looking at traditional tax planning, such as the structuring of buy-to-let property portfolios and family wealth planning, in particular when parents wish to help children onto the property ladder.
Within this article, we answer some of the common questions that we get surrounding the 3% surcharge on SDLT applied for ‘additional properties’.
The 3% ‘additional property’ surcharge
April 2016 saw the introduction of the 3% surcharge on the purchase of ‘additional property’ i.e. any additional properties beyond your main residence.
Only applicable to residential property, the surcharge works by increasing the rate of SDLT by 3% in each band. The current rates have been in place since 23 September 2022 and a purchase of additional property worth more than £40,000 and up to £250,000 would normally be charged SDLT at 0% and this increases to 3%.
Will I have to pay the 3% surcharge if replacing my main home?
The 3% surcharge is not applied on the replacement of your only or main residence (i.e. your home). As is often the case, when the sale of the old home and the purchase of the new home complete on the same day, the surcharge will not be raised.
In circumstances where the new property purchase completes before the previous home is sold the 3% surcharge will be raised, however, it can be claimed back providing the previous home is sold within 3 years.
This could result in significant cash flow challenges if affected, as you will need to pay the additional SDLT upfront and will only be able to claim this back once your previous home is sold.
What if I, my spouse or civil partner already owns another property?
When testing whether the 3% surcharge is payable or not, a married couple or civil partners are treated as one person.
You could therefore encounter a situation where, for example, one party wishes to purchase a property and has never owned one before. Their partner, however, already owns the family home. As they are married, they are treated as already owning a property and the 3% surcharge will apply to the purchase.
This situation will not be uncommon for couples where one or both of you already own a property at the start of your relationship. If you are affected by this, you should make sure you understand the extra costs you will incur before completing on a property purchase.
You should also take care when making transfers between you and debt, such as a mortgage, is involved.
One or both spouses may own a second home or a buy to let property secured by a mortgage. For a number of reasons this additional property may be transferred between spouses either in full or partially. In most cases no cash is changing hands, however, one person would be undertaking debt in the form of the mortgage, which is treated as chargeable consideration for SDLT.
If the debt undertaking is more than £40,000 the 3% surcharge would apply and be due for payment within 14 days of the transfer. Unlike Capital Gains Tax and Inheritance Tax, there is no spousal exemption or beneficial tax treatment for this type of transaction.
What if I buy property in joint names with other people?
Where there is more than one person purchasing a property, the 3% surcharge will applied to the whole consideration if any one of those buyers meet the conditions for the surcharge to apply.
This is particularly relevant for unmarried couples, or situations where families are looking to help children get onto the property ladder. If you are a parent wishing to help your child purchase their first home, you may want to own a stake in the property; if you already own a property, then the 3% surcharge will apply to the whole purchase.
The solution might be to gift cash to the child instead. In this instance, you will need to decide if you are happy to give that money away, without any guarantee or security. Where some level of control is desired, it may be possible for a debt or first charge to be secured on the property.
What if I am a buy-to-let landlord?
There are no particular reliefs from the 3% surcharge for property landlords, no matter how your portfolio is structured.
Many landlords will have considered whether it is more beneficial to operate as a company than in their own names or in partnership, due to other tax changes, most notably the restriction on loan interest relief against property income.
First-time buyer discount
Relief for first-time buyers has been in place since 2017 so that SDLT will not be payable on the first £425,000 of their new home, providing the property is worth no more than £625,000. A discounted rate of 5% applies to the portion between £425,501 to £625,000.
Where two or more people are buying together, all must be ‘first-time buyers’ to attract this relief. Once again, this highlights the need for families to act with caution with regards to their ownership of property to make sure they do not jeopardise the relief.
In addition to the 3% additional property surcharge, a new surcharge of 2% for non-resident purchasers has been in place since April 2021. It is possible for both surcharges to apply at the same time, increasing each band of SDLT by 5%.
Please note: Property in Scotland is subject to Land and Buildings Transaction Tax, and property in Wales is subject to Land Transaction Tax. Whilst many elements of these taxes will be similar to SDLT, they have not been discussed within this article.
Despite these somewhat onerous changes, with the right planning you may still be able to achieve your desired outcome without incurring an unexpected or restrictive SDLT charge. The key is to take that advice well in advance of purchasing a new property – contact one of our team using the form below, and we’d be happy to discuss your particular circumstances with you.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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