Stamp Duty Land Tax On Second Homes – Costly Changes Ahead

In the autumn Statement 2015, the Government announced a five-point plan for housing, which included proposals for introducing higher rates of stamp duty land tax on purchases of additional residential properties. Sarah Laing looks at the current proposals, which are expected to be finalised shortly.

Stamp duty land tax (SDLT) is paid on the purchase of residential property in increasing portions of the property price above £125,000. Current rates are as follows:

Up to £125,000 Zero 3%

The next £125,000 (portion from 

£125,001 to £250,000) 2% %

The next £675,000 (portion from 

£250,000 to £925,000) 5% 8%

The next £575,000 (portion from 

£925,000 to £1.5 million) 10% 13%

The remaining amount (portion 

above £1.5 million) 12% 15%

The proposed higher rates will only apply to purchases of additional residential property which complete on or after 1 April 2016. If contracts are exchanged after 25 November 2015, the higher rates will apply if the purchase is completed on or after 1 April 2016. However, if contracts were exchanged on or before 25 November 2015 but not completed until on or after 1 April 2016, the higher rates will not apply. 

John buys his first, and only, residential property on 6 May 2016, which costs £300,000. The transaction will attract SDLT as follows:

£125,000 x 0% = £0

£125,000 x 2% = £2,500

£50,000 x 5% = £2,500

Total SDLT due £5,000

Paul already owns one residential property, but purchases a second house on 6 May 2016 costing £300,000. This transaction will attract SDLT as follows:

£125,000 x 3% = £3,750

£125,000 x 5% = £6,250

£50,000 x 8% = £4,000

Total SDLT due £14,000

The higher rates will not apply if, at the end of the day of the transaction, an individual owns only one residential property, irrespective of the intended use of the property.

If, at the end of the day of the transaction, an individual purchaser owns two or more residential properties, whether the purchaser pays the higher rates or not will depend on whether they are replacing their main residence. If the purchaser has sold a previous main residence within 18 months before the day of the transaction and the transaction is a purchase of a new main residence, the purchaser will be considered to be replacing a main residence. Where an individual is replacing a main residence, the higher rates of SDLT will not apply. 

However, if the purchaser is not replacing a main residence (either because they have not sold a previous main residence within the last 18 months, or the property being acquired is not a new main residence), the higher rates will apply. 

Recognising that there may be certain circumstances where purchasers experience difficulties with conveyance transactions, there will be a refund mechanism for those who sell their previous main residence within 18 months of the purchase of the new main residence.

Married couples and civil partners who own one property at the end of the day of a transaction will not pay the higher rates of SDLT. However, if either of them owns more than one residential property, they may pay the higher rates when purchasing another property. 

There are many scenarios where two or more unmarried people may own or purchase property jointly. The proposals currently state that if, at the end of the day of a transaction, any of the joint purchasers has two or more properties and is not replacing a main residence, the higher rates will apply to the entire consideration for the transaction. This is designed to provide simplicity and aligns with other areas of the tax system. However, as the purchased property may be a first property for one or more of the joint purchasers, the government is currently considering whether this is the fairest outcome.

Residential properties, including a tenancy or lease of a residential property, worth less than £40,000 will not be taken into account when determining if an additional residential property is being purchased.