Stamp Duty on Buy to Let Homes - The Latest Update

Mon 21 Mar 2016 by Cordelia O

Written by Cordelia O

How increases in Stamp Duty will hit buyers of second homes and buy-to-let property

The Chancellor has made some concessions to his planned Stamp-duty hike on second homes and buy-to-let properties, as revealed in the detailed plans released as part of this week’s budget. But he has also extended the scope of the original plans so that the higher rates will now hit those who buy more than 15 properties.

His basic plan is to increase the standard rates of Stamp Duty by 3% for anyone buying an additional home on and after 1 April 2016.

For example, the SDLT due on a £300,000 purchase of a second home or buy-to-let property that is liable to the higher rates will be £14,000, calculated as follows:

Charge SDLT Due
3% on the first £125,000 £3,750
5% on the next £125,000 £6,250
8% on the final £50,000 £4,000
Total SDLT due £14,000

The increased rates will not apply when someone sells their home and completes the purchase of another one on the same day. But it will hit homeowners who decide to buy a new home before they have sold their existing one.

Changes to the proposal

However the Chancellor has now agreed that if they then sell their first home within three years (rather than 18 months as originally proposed) they can claim a refund of the increased duty paid on the second purchase – but they will still have to pay higher-rate duty up-front.

The new rules do not specifically target buy-to-let purchases, but if a buyer already owns a home then a buy-to-let purchase will be caught. However if someone who is renting a home decides to buy a property in order to let it out they will not have to pay duty at the higher rate (but will have to do so if they subsequently buy another property.)

The higher rates will not apply if the current value of the existing property is less than £40,000 or the price of the property being purchased is less than £40,000. Nor will the new rules apply to the purchase of mobile homes, land, non-residential or mixed-use property (part residential/part commercial.)

Off-plan purchases of residential property which has yet to be built will be classed as dwellings as will holiday homes, including those which cannot be used all year round. (Legal completion of off-plan purchases does not usually take place until the property is physically completed, but no doubt this provision is an anti-avoidance measure.)

Transitional rules may apply

Transitional rules will apply to cases where purchase contracts were entered into before 26 November 2015 (the date of the Chancellor’s original announcement) which complete after 31 March 2016.

As ever with taxation legislation, the devil is in the detail. There are very complicated rules which set out when the new rates are to apply in particular situations such as when a homebuyer owns a part-share in another property or when joint owners are buying.

Different types of purchases have different rules

There are also detailed rules which will determine whether property owned by a trust or by business partners will count for the purposes of the higher rate duty, and also to transactions following the death of an owner or as a consequence of a divorce or separation settlement.

If a buyer already owns a part-share in another home it seems that they will be liable for higher-rate duty unless that share is worth less then £40,000 at the time of the second purchase.

If a property is purchased by joint purchasers the higher rates will apply if the transaction would be a higher rate transaction for any of the purchasers considered individually.

The charges count even outside of the UK

One important point to note is that the new rates will apply if a buyer or one of joint buyers owns (or has a ‘major interest’ in) another property anywhere in the world. 

They will also apply if a buyer’s spouse or civil partner owns or has a ‘major interest’ in a property, whether in the UK or abroad, even if that spouse or civil partner is not named as a buyer of the new property.

There are various rules which will enable owners who buy another home and then sell their original home within three years to reclaim the difference between the duty at standard rates and the higher rate duty. Owners in such a position will have to be careful if they want to qualify for such a refund, and make sure it is claimed promptly.

It is not possible in this short article to give full details of the new rules and it will often take a considerable amount of investigation to determine whether or not the new rules apply. In some cases this may involve obtaining a valuation of a property, which will create problems if the property is located abroad. 

There may also be difficulties in determining whether an interest in foreign property amounts to a ‘major interest’ as property laws differ throughout the world.

The new changes are going to cause problems for conveyancing solicitors who normally complete the return forms required in connection with payment of stamp duty. Solicitors will not necessarily know about properties their clients already own so buyers can expect their solicitor to ask them questions about this. 

In case any buyers are thinking of avoiding the increased stamp duty by buying a second home in Scotland, the Scottish Parliament has also just introduced amendments to its own Land Transaction Transfer Tax (the equivalent of Stamp Duty) which broadly mirror the changes which apply in the rest of the UK.

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