Stamp Duty Surcharge on Second Homes – Far Reaching Effects

Pippa Oldfield, Financial Planning Analyst at Leeds-based Financial Planning firm Manse Capital, considers the wide impact of the forthcoming Stamp Duty surcharge.

The Autumn Statement 2015 saw the Treasury announce a 3% premium in Stamp Duty on all second residential and Buy to Let properties purchased for £40,000 or more, with effect 1 April 2016. The plan, which aims to raise £1bn by 2021 and to re-focus support for low-cost home ownership for first time buyers, will significantly increase the initial outlay for additional property purchases.

The higher rates will be 3% above the current Stamp Duty (SDLT) residential rates and will be charged on the portion of the value of the property that falls into each band as follows:

Band

Existing Residential SDLT Rates New Additional Property SDLT Rates
£0 – £125k

0%

3%

£125k – £250k

2%

5%

£250k – £925k

5%

8%

£925k – £1.5m

10%

13%

£1.5m +

12%

15%

So, a second property purchased for £200,000 would incur Stamp Duty of £1,500 based on the existing rates. If the purchase is completed after 1 April 2016, the surcharge would result in a £6,000 additional tax!

Note that the higher rates will not apply to transactions completed after 1 April 2016 if the contracts were exchanged before 25 November 2015, or to purchases of commercial properties. Also exempt are bulk purchases of 15 residences or more, as this is deemed to contribute the Government’s housing supply objective.

Beyond that, the legislation is far reaching in terms of the buyers affected. Anyone considering purchasing an additional property should take into account the potential surcharge, whether they are buy-to-let landlords or not. If you’re purchasing residential property in the following situations, you need to take note:

  • An investment property to let
  • A holiday home
  • Purchases of properties for children, where the parents wish to help their adult children onto the property ladder, the higher rates will apply if the parents become joint owners. If the parents simply lend or gift the funds to assist the purchase in the name of the adult child, or acts as a guarantor on the mortgage, the higher rates will not apply.
  • A person who owns and lives in a property overseas and purchases a second base in the UK.
  • A person who first purchases a buy to let, whilst living in rented or job related accommodation, and later buys a main residence.
  • Purchases of residential property by companies (even if it is the first residential property purchased by the company)
  • Purchases made by Trustees of Discretionary Trusts. Where the trust is a bare trust or interest in possession trust, the question of whether the higher rates will apply will be determined by reference to the number of properties owned by the beneficiary with the absolute entitlement or interest in possession.
  • The effects don’t stop there. What happens if someone buys a new home, intending to replace their current main residence, but completes the new purchase before having sold their existing home? There may be a period between buying the new home and selling the old one where two properties are temporarily owned.
  • Such buyers affected would include those with large capital sums ahead of selling, say from an inheritance, the sale of a business or a pension tax free cash lump sum, who wish to complete on the new property purchase quickly for peace of mind and flexibility. Equally, buyers who encounter unforeseen circumstances, such as their sale falling through, would also be affected.

Where it is intended that the second property will replace the main residence but the main residence has not yet been sold, the transaction will be subject to higher Stamp Duty, but a refund will be given if the original residence is sold within 18 months of the transaction.

Furthermore, those in this situation could face higher long term mortgage interest rates as a result of the measure. If a borrower chooses to effectively add the 3% surcharge to a mortgage, by borrowing more, it might push the buyer into a higher LTV bracket, carrying higher repayment costs.

Of course, if the new property transaction is completed before 1 April 2016, the surcharge will be avoided.

Finally, married couples or civil partners will be treated as ‘one unit’ for purposes of the new rules. This means that couples who each purchase a property in their sole name will not escape the rules, or an individual buying their first and only property will be charged the higher rates, if their spouse owns a property already.