The introduction of a higher rate of Stamp Duty Land Tax (SDLT) for people who own more than one residential property has proved controversial as it has had some unexpected consequences. Although aimed primarily at investors and second home owners it has the potential to apply in a wider range of circumstances and people unaware of this have been caught out and found themselves having to pay significantly more SDLT than they were expecting.

To help you understand how the rules surrounding the higher rate of SDLT work, Emma Cook, residential property expert with Talbot Walker LLP considers some of the situations where the higher rate may apply and the steps you can take to ensure that you only pay the higher rate where required.

SDLT and the additional property rate

When you buy a property you will usually have to pay SDLT, which is calculated as a percentage of the purchase price or value transferred. Where the higher rate for additional properties applies you are likely to have to pay a lot more SDLT than you would normally. This is for two reasons:

1. There is no exempt amount below which the higher rate of SDLT does not need to be paid. This is in contrast to where the standard rate of SDLT applies where there is no charge levied on the first £125,000.
2. The rate at which SDLT must be paid where the purchase price or value of a property exceeds £125,000 is three per cent higher than it would be if the standard rate applied.

Example 1

Alex buys a property for £100,000. He owns no other property. Ignoring the special rates of SDLT that apply for first-time buyers, Alex will pay no SDLT on his property purchase because he can take advantage of the £125,000 exemption.

John buys a property for £100,000. This will be his second property purchase as he already owns another property. John will pay SDLT of £3,000 because the £125,000 exemption is not available to him.

Example 2

Alice buys a property for £400,000. She owns no other property. As a standard rate SDLT payer, she will have to pay SDLT of £10,000.

Sarah buys a property for £400,000. She already owns another property. As a higher rate SDLT payer, she will have to pay SDLT of £22,000.

When the additional property rate applies

The higher SDLT rate applies if you buy a residential property in England, Wales or Northern Ireland and you already own a residential property, even if that property is overseas. It will apply if you are buying, or already own, a holiday home or buy-to-let investment. However, the higher rate may also apply in some other situations, which are less apparent.

Delays in a transaction

You will have to pay the higher rate if you unintentionally find yourself owning two properties because completion of a property you are selling is delayed. This can sometimes happen where, despite everyone’s best efforts, the date on which you conclude the sale of your property cannot be coordinated to happen on the same day as your related purchase.

The good news is that, where you are buying a property to replace your main residence, you will be able to claim back the difference between the higher rate and the standard rate of SDLT provided you sell your former home within three years.

Your spouse owns another property

Significantly, if your spouse or civil partner already owns a residential property, Her Majesty’s Revenue and Customs will treat you as though you own the property as well. This means that if you decide to purchase another property in your sole name you will have to pay SDLT at the higher rate, even if the property your spouse or civil partner owns is in their sole name and the new home you are buying will be your first purchase.

Moving in together

If you are planning to buy a new home with a partner, and one of you already owns a property, the higher rate of SDLT will apply. This is so even if you already cohabit in that property since the main residence exemption referred to above does not apply unless you are married or in a formal civil partnership.

Inherited property

The higher rate will also apply if you unintentionally find yourself owning two properties because you have been left a property in someone’s will. However, if you have inherited a half share, or less, in a property in the three years before your purchase, you will not have to pay the higher rate of SDLT on your purchase unless you already own another property.

When the higher rate will not apply

There are a small number of situations where the higher rate of SDLT will not apply even if you already own a property. For example, if the property is worth less than £40,000 or if your only existing interest in a property is as a trustee with no beneficial interest.

It also does not apply if you are married or in a civil partnership and are selling your main home and replacing it with a new one. In these circumstances, provided you complete your sale and purchase on the same day you will only have to pay SDLT at the standard rate under the main residence exemption. However, if your sale is delayed then you will have to pay SDLT at the higher rate, although you will be able to claim a refund provided the sale goes through within three years.

The rules governing the circumstances in which the higher rate will not apply can be complex and it is worth discussing your personal circumstances with your solicitor who can advise you about the availability of any reliefs or exemptions.

Some practical issues

As well as advising you on your potential liability for the higher rate of SDLT, your solicitor can help to ensure that your transaction is structured to reflect your true intentions, so that you pay only the right amount of SDLT. For example, if you are considering helping your child buy a property, becoming a joint owner with them may trigger the higher rate. By contrast, an alternative arrangement in which you take on responsibility for the mortgage but acquire no beneficial interest generally will not.

Last year, 15,700 people claimed refunds for overpayment of SDLT, a process which itself can be fraught with difficulty. With the increasing complexity of the rules surrounding SDLT, it makes sense to discuss your plans with your solicitor early on.

For a confidential discussion about stamp duty land tax, buying a second home or residential conveyancing generally, please contact Emma Cook on 01264 721707 or email emmac@talbotwalker.co.uk
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.