If purchasing an additional property is on your radar, in the coming months, you should be considering the impact of the current stamp duty surcharge on your plans.

Whether you’re a landlord, a parent wanting to purchase property for your child, a couple thinking of purchasing properties in each of your names, or you’re living abroad but intend to acquire a property in the UK, the surcharge will come into play.

Q: What is Stamp Duty Land Tax (SDLT) and what is the 3% surcharge?

A: Stamp Duty Land Tax (SDLT) is a levy on transactions involving land. The 3% SDLT surcharge was introduced on 1 April 2016 and is charged on top of existing Stamp Duty rates. It is referred to as the ‘Higher Rates on Additional Dwellings’ (HRAD) by HM Revenue & Customs (HMRC).

Q: What are the current rates of SDLT?

A: The current rates of SDLT are as follows:

For residential property
Purchase price Standard SDLT rate With additional SDLT rate
On the first £125,000 of the property price 0% 3%
On the next £125,000 2% 5%
On the next £675,000 5% 8%
On the next £575,000 10% 13%
On the rest (above £1.5 million) 12% 15%

Q: How do I know if I’m required to pay the surcharge?

A: In the UK, you will be required to pay the 3% SDLT surcharge if you are purchasing an additional residential property, or a share in another property at, or in excess of £40,000.

Put simply, if at the end of the day of the transaction you own two or more residential properties that have not replaced your main residence, you will be liable to pay the 3% surcharge. This also applies to all residential purchases made via companies or other entities.

Q: How does the surcharge apply?

A: Standard Stamp Duty is charged on a tiered basis, similar to income tax. However, the 3% surcharge applies to the purchase price as a whole.

If the additional property cost you £250,000…

  • The first £125,000 0% SDLT        £0
  • The next £125,000 2% SDLT        £2,500
  • Surcharge on £250,000 3% HRAD       £7,500
  • Total tax payable £10,000                      

Q: What if the property I am buying replaces my main residence?

A: If the property you are purchasing replaces your main residence, the 3% surcharge will not be applied, even if you own an additional property/properties (such as a second home or a property that you let out).

As far as HMRC is concerned, your main residence is the home that you live in with a degree of permanence. Which property meets the criteria to be deemed as such, will be judged by HMRC as a matter of ‘fact’.

Replacing your main residence does mean that the residence you previously occupied must have been disposed of, i.e. sold or gifted.

Q: Does the surcharge apply to furnished holiday lets?

A: Furnished holiday lets will receive the same treatment as any other additional property purchases, according to HMRC. If the property is considered to be ‘suitable for use as a dwelling’, then the surcharge will apply.

Q: How do the rules apply if I own a property already, but I am buying another with someone who does not?

A: Even if just one of you already owns a residence (whether you are occupying it or not), when you purchase another together the surcharge is likely to apply to the transaction in its entirety.

Q: Is it beneficial to buy through a limited company?

A: Purchasing a property/properties via a limited company will not exempt you from paying the surcharge. The relatively modest £40,000 threshold means that the additional rate will still be due in most cases.

Q: Are there any exemptions?

A: Besides the replacement of an only or main residence, there are a few other exemptions to be aware of. For example, you will not be liable to pay the 3% surcharge on additional homes that cost less than £40,000.

Furthermore, the purchase of non-residential properties (i.e. offices) will not be subject to the higher rates of tax. Should you already own a non-residential property, the purchase of a residential property in addition to this will not be subject to the higher rates either. There are different rules to consider when purchasing mixed-use properties.

How can George Hay help?

Engaging our services can help you to ensure that you are always up to date with the latest legislation and, consequently, that your property portfolio or business is operating as efficiently and cost-effectively as possible.

We help our clients to understand their current tax liabilities and to prepare for changes to property taxation as they arise. We work with you (and other trusted advisers such as your letting agent) to identify risks (and solutions), as well as opportunities to maximize your investment.

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