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 get onto the property ladder.
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. Broadly, this is applied at the end of the day, on the day of completion on the additional property.
Only applicable to residential property, the surcharge works by increasing the rate of SDLT by 3% in each band. Therefore, the purchase of an additional property worth £125,000 would previously have been charged SDLT at 0% and will now be charged at 3%.
Will I have to pay the 3% surcharge if replacing my main home?
The 3% surcharge is not applied on the replacement of the purchaser’s only or main residence (i.e. their 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 for those affected, as owners will need to pay the additional SDLT fees upfront in order to complete on their new property, knowing that they will be able to claim this back once their previous home is sold.
What if me or 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, a husband wishes to purchase a property and has never owned one before. His wife however, already owns the family home. Because they are married, he is treated as already owning a property and the 3% surcharge will apply to his purchase.
This situation will not be uncommon for couples where one or both individuals already own a property at the start of their relationship. Those affected should make sure they understand the extra costs they will incur before completing on a property purchase.
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 already owns a property.
This is particularly relevant for unmarried couples and situations where families are looking to help children get onto the property ladder. A parent wishing to help their child purchase their first home may want to own a stake in the property. If that parent already owns a property however, the 3% surcharge will apply to the purchase.
The solution might be for the parent to gift a cash payment to the child instead, and the parent must decide if they are happy to gift that money – without any guarantees or security. Saving that, a debt or first charge could be secured on the property allowing the parent to retain some control without owning an interest in the property itself.
What if I am a buy-to-let landlord?
There are no particular reliefs from the 3% surcharge for property landlords, no matter how their 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 Section 24 mortgage interest relief. This has no bearing on the SDLT payable when purchasing new property, but is certainly an area where advice is required and Price Bailey can assist with.
First-time buyer discount
The November Budget in 2017 introduced a new relief for first-time buyers so that SDLT will not be payable on the first £300,000 of their new home, providing the property is worth no more than £500,000.
Where two or more people are buying together, all of them 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.
Property in Scotland however is subject to Land and Buildings Transaction Tax. From 1 April 2018 property in Wales is now 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.
This post was produced by Michael Morter CTA ATT, Private Client Tax Manager at Price Bailey. To contact him about any of the points raised in the article above, feel free to get in touch using the form further below.
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.