The 3% SDLT surcharge and main residences
James Burgess, a partner in our commercial property team, examines the upcoming change in the treatment of main residences for the purpose of the 3% SDLT surcharge.
SDLT on residential property is changing on 26 November 2018.
Currently, if you buy a residential property worth £125,001 or more then you may have to pay stamp duty land tax (SDLT) to HM Revenue and Customs (HMRC). SDLT applies in England and Northern Ireland (with a similar type of tax governed by different rules applying in Scotland and Wales). Purchasers pay a fixed rate of SDLT on the portion of the purchase price that falls within each SDLT band (see Figure 1). Some purchasers, like first-time buyers, qualify for relief which reduces or entirely removes SDLT.
|SDLT band||SDLT rate|
|Up to £125,000||Zero|
|The next £125,000 (the portion from £125,001 to £250,000)||2%|
|The next £675,000 (the portion from £250,001 to £925,000)||5%|
|The next £575,000 (the portion from £925,001 to £1.5 million)||10%|
|The remaining amount (the portion above £1.5 million)||12%|
Figure 1: SDLT bands and rates for residential property (www.gov.uk/stamp-duty-land-tax/residential-property-rates)
If you buy an additional residential property, for example a second home, holiday home or buy-to-let property, then you may also have to pay an additional 3% SDLT surcharge to HMRC. It applies to the purchase of a dwelling or a share in a dwelling which is worth £40,000 or more. Purchasers pay 3% additional SDLT on the total purchase price of the dwelling if they purchase the whole dwelling, or their share of the dwelling (see Figure 2) subject to certain complicated deeming provisions involving spouses and civil partners.
|SDLT band||SDLT rate including 3% SDLT surcharge|
|Up to £125,000||3%|
|The next £125,000 (the portion from £125,001 to £250,000)||5%|
|The next £675,000 (the portion from £250,001 to £925,000)||8%|
|The next £575,000 (the portion from £925,001 to £1.5 million)||13%|
|The remaining amount (the portion above £1.5 million)||15%|
Figure 2: SDLT bands and rates for residential property including the 3% SDLT surcharge
If your purchase of an additional residential property triggers the 3% SDLT surcharge in addition to the standard SDLT payment, then this can be costly. For example, on the purchase of an additional residential property worth £250,000, the 3% SDLT surcharge is £7,500 on top of the standard SDLT payment of £2,500.
There are exemptions. The main exemption, which only applies to individuals, is replacement of a purchaser’s only or main residence. ‘Main residence’ is assessed objectively and looks at facts such as where a purchaser and their family live, where the purchaser spends most of their time, where they are registered to vote or pay council tax or attend doctors’ appointments etc.
The main residence replacement exemption
The specific conditions that need to be satisfied for this exemption to apply depend on the order in which you dispose of your old main residence and purchase your new main residence.
If you purchase your new main residence before you dispose of your old main residence, then your new main residence will at that time be an additional residential property on which you must pay the 3% SDLT surcharge. However, you can apply for a full refund of the 3% SDLT surcharge from HMRC if you satisfy four conditions:
Condition 1. On completion of the purchase of the new main residence, you intend that the new main residence will be your only or main residence
Condition 2. You, your spouse or your civil partner sell or gift the old main residence within three years of completion of the purchase of the new main residence
Condition 3. Once the old main residence is sold or gifted, you, your spouse or your civil partner do not hold any major interests in the old main residence
Condition 4. At some point during the three years before the new main residence was purchased, you lived in the old main residence as your only or main residence
If you dispose of your old main residence before or at the same time as you purchase your new main residence, then the conditions which need to be satisfied for this exemption to apply depend on the completion date of the purchase of the new main residence.
If you complete on or before 26 November 2018, then you do not need to pay the 3% SDLT surcharge if you satisfy five conditions:
- As per Condition 1 above.
- As per Condition 2 above, but with the three-year time limit removed; meaning that the old main residence could have been sold or gifted several years ago.
- As per Condition 3 above.
- As per Condition 4 above, but with the three-year time limit removed. Therefore, your old main residence could have been your main residence several years ago.
- At no point on or after the sale or gift of your old main residence have you or your spouse/ civil partner obtained a major interest in another dwelling with the intention of that dwelling being your only or main residence.
However, if your purchase of a new main residence completes after 26 November 2018, then the same conditions apply as in the previous paragraph with the caveat that the three year time limits are reinstated in Conditions 2 and 4. These time limits will make it more difficult for purchasers to satisfy the conditions and in turn make it harder to avoid paying the 3% SDLT surcharge.
If the coalition government intended to even up the playing field between multi-property owning investors and ‘buy-to-live’ homeowners (as well as to increase their tax-take) then this law change has been very effective in that goal.
If you have any questions or would like to discuss any of the issues raised in this article further James Burgess would be happy to speak to you.