Parts 1 and 2 of this series of articles outlined the provisions under which the newly introduced 3% additional SDLT charge applies where a residential property is purchased jointly (e.g. by a married couple, co-habitees, friends). They also highlighted how a married couple may be treated differently to co-habitees (and, indeed, vice versa).
The basic provisions which, if satisfied, lead to the levying of the 3% charge are as follows:
(a) an interest in a residential dwelling is purchased by an individual;
(b) the consideration for the transaction is £40,000 or more;
(c) the individual already has an interest in another residential dwelling with a market value of £40,000 or more; and
(d) the new purchase is not a replacement for the purchaser’s only or main residence.
Conditions (b) and (c) above provide for possible exemptions from the 3% charge.
No 3% charge despite owning more than one residential property
Condition (c) above allows a second (or indeed third, etc.) residential purchase to be made without the 3% charge even where the purchaser already owns another such property if the market value of the other property is less than £40,000. Strictly speaking, it is not the market value of the other property which needs to fall below £40,000 but the purchaser’s interest in that property.
Example 1: No 3% SDLT whilst owning two or more properties
Mary and Sue live with their parents. They have decided to jointly (i.e. 50:50) purchase a property (market value £100,000), in which they both intend to live as their home.
They already jointly own a buy-to-let whose market value is £78,000.
As each of Mary and Sue’s interest in the buy-to-let is worth £39,000 (i.e. below £40,000), the 3% charge will not apply to their proposed purchase.
However, if Mary and Sue owned the buy-to-let as tenants-in-common (Mary owning 70% and Sue 30%), the 3% charge would then apply on their proposed purchase. This is because Mary’s interest in the buy-to-let has a market value of £54,600 (i.e. not less than £40,000); see Parts 1 and 2 of this series of articles for the details regarding joint purchases. The 3% charge then applies to the whole consideration for the new purchase (i.e. £3,000) not just to Mary’s proposed 50%.
De minimis ‘let–out’
Whether a residential purchase is effected by one or more persons, the 3% charge does not apply if the aggregate consideration for the purchase is less than £40,000 (condition (b) above). Note that it is the aggregate consideration which is relevant, not the consideration each joint purchaser may contribute. This exemption applies irrespective of how many other properties any of the purchasers may own.
Example 2: No 3% SDLT charge
Bob, Bill and Ben are three friends each living at home with their parents.
They have found a somewhat dilapidated cottage for sale at £38,500 which they jointly purchase.
As the consideration in total is less than £40,000, the 3% charge does not apply.
Only or main residence
Where the purchase involves a replacement of the purchaser’s only or main residence the 3% charge does not apply (condition (d) above).
The SDLT legislation does not lay down what precisely constitutes an individual’s residence. Accordingly, it is a question to be determined in the light of all the facts (note that if an individual lives in two properties it is not possible for SDLT purposes to ‘elect’ which of the two is the main residence, as is the case for capital gains tax purposes).
It is interesting to note that to qualify as a replacement residence requires that at the date of purchase the purchaser ‘intends the purchased dwelling to be the purchaser’s only or main residence’ (broadly, requiring immediate occupation).
Where the replacement residence is purchased on or before 26 November 2018 the sale of the former residence may take place at any prior time (i.e. a three-year requirement does not need to be satisfied). For purchases of a replacement residence thereafter, the prior residence would need to have been sold within three years of the date of purchasing the former.
Where the replacement residence is acquired before the prior residence is sold, the prior residence must be sold within three years of the purchase of the replacement residence (in this scenario, the 3% charge is initially payable on purchase, but can be reclaimed if the three-year window is satisfied).
Inherited property
Where a property is jointly inherited (i.e. if the interest inherited in the property is 50% or less), for a period of three years thereafter this interest can be ignored when determining if the inheritor owns two or more properties.
Practical Tip:
To avoid the need to reclaim the 3% charge, ensure that the purchase of a replacement residence is after (not before) the sale of the prior residence.
