If buying another property is on your agenda this year, you’ll need to factor in the Government's confusing 3% Stamp Duty surcharge. Here's what you need to know about the tax.
By Laura HowardApril 8, 2016 14:00
UPDATED ON 9 JANUARY, 2019
What is the 3% Stamp Duty surcharge and who pays it?
The 3% is a loading on existing Stamp Duty rates (set out in the table below). First announced in the Chancellor’s 2015 Autumn Statement, the new rules took effect from 1 April, 2016.
To avoid the 3% surcharge, you had to complete on the purchase of a second residential property by midnight on 31 March, 2016. That is unless you previously exchanged on or before November 25, 2015.
The extra tax applies to anyone who is buying an additional residential property, for example a buy-to-let or holiday home, within England and Northern Ireland.
Wales and Scotland operate under separate sets of legislation. Stamp Duty was replaced by Land Transaction Tax (LLT) in Wales in April 2018, and it is now called Land and Buildings Transaction Tax (LBTT) in Scotland.
This guide refers to rules in England and Northern Ireland, which are administered by HMRC.
What if the home I already own is abroad?
You're liable to pay the 3% surcharge even if the home you already own (or part-own) is abroad. So, if you have a holiday apartment in Spain and are buying your first home in the UK, you’ll have to pay the 3% additional tax.
What if the second home I am buying is abroad?
If the second home you are buying is abroad, the purchase and related costs will fall under the buying laws of that country, so neither Stamp Duty nor the 3% surcharge will be relevant.
How is the extra tax charged?
Since the end of 2014, regular Stamp Duty has been charged as a tiered tax. This is like income tax, where you only pay the higher rate on the slice above any threshold. However, the 3% surcharge still works as a slab tax which means it applies to the entire purchase price of the property.
As an example, if you are buying a second home that costs £300,000, the extra 3% Stamp Duty would equate to £9,000, or 3% of the entire price. If you add that on to the £5,000 regular Stamp Duty bill on a home of this value, you’d end up paying £14,000 in total.
What if I am buying a second home for my child?
If the second home you are buying is for your child and you already own a home, you will be liable for the 3% surcharge if your name is on the property deeds – even if it’s joint with your child’s name. If you bought the home for your child outright and just their name was on the deeds, the 3% surcharge would not apply.
What if I am buying with a partner who doesn’t already own?
If you have a second home and you are buying jointly with your partner who doesn’t already own, the 3% Stamp Duty surcharge will still apply.
Just as if you were buying for your child, you may be able to escape the surcharge here by putting the property entirely in the name of the person who doesn’t already own a home.
Ray Boulger, senior technical director at mortgage broker, John Charcol, said: “If you can’t satisfy the lender’s affordability criteria in just one person’s name, some lenders such as Metro Bank and The Woolwich, will allow you to put two names on the mortgage, and just one the property deeds.”
What if I am replacing my main residence?
If the home you are buying directly replaces your main residence, you will not have to pay the 3% surcharge, even if you own an additional home(s) at the same time. This example is straight from the Government's consultation document:
"A owns both a main residence and a second home. She sells her main residence and purchases a new one. Although she has two properties at the end of the day of the transaction, she has replaced her main residence so the higher rates will not apply."
Rented accommodation however, does NOT constitute a main residence as your previous main residence will need to be disposed of (ie, sold) to escape the surcharge. Gifting a property DOES constitute disposing of your main residence, according to the Treasury.
What if I am buying a property with a ‘granny annex’?
Initially, the 3% surcharge was going to be applied to any annex purchased alongside a main residence, if it had a value of more than £40,000, could be bought by a third party and used as an independent dwelling.
However, due to what it described as a 'technical unfairness', the Government has made a u-turn on this by way of an amendment to the Finance Bill.
It has now agreed that, so long as the annex is bought alongside the main residence, it will NOT be subject to the higher rates Stamp Duty.
An annex must be within the grounds of the main home and worth no more than a third of the total transaction value.
A Treasury spokesperson said: "Under the new rules, if you buy a main residence (either your first property or a replacement for a previous main residence) worth £250,000 and an annex capable of separate sale worth £50,000 in a single transaction, Stamp Duty at the standard rates will be charged on the total value of £300,000.
Anyone who has already paid the extra surcharge in this circumstance can apply to have it refunded.
Find out more on granny annexes with this article by real estate lawyer and Stamp Duty expert, John Shallcross: Buying a home with a granny flat? Find out if the 3% Stamp Duty surcharge could affect you
What if I need to buy another main residence before I can sell my last one?
If you buy a new main residence (Home A) but are either unable to sell your previous main residence (Home B) or you just choose to keep it and rent it out, you will have to pay the 3% Stamp Duty surcharge initially. However, so long as you sell Home B within 36 months of completing on the purchase of Home A, HMRC will make a full refund.
The refund in fact applies to the sale of any property that has been your only or main residence at some point during the 36 months leading up to the purchase. In other words, you don't have to be moving directly out of one main residence and into a new one. The amount of time you spent living in a previous main residence will not be relevant.
What if I sell my main residence but I'm not able to buy another one straight away?
On the flipside, you may have to sell your main residence and move into an interim property (rented or with family for example) before you can buy your next one. In this case, you will have 36 months (after completing on the sale) during which time you can buy a new main residence without being hit with the surcharge.
However, this time cap is only in place for purchases made after 26 November 2018. To make it fair to people who had already sold their main residence before the Autumn Statement (when the higher rates were announced), for purchases made on or before 26 November 2018, this '36-month test' does NOT apply.
Find out more with John Shallcross' article: The all-important rule that could see you escape paying higher rates of Stamp Duty
What if I inherit a property?
No Stamp Duty is payable on properties that are inherited, so the 3% premium is not relevant. However, if you have inherited a property and go on to purchase a second home without selling it, you will be hit with the surcharge.
What if I am a professional landlord?
In its initial consultation, the Government had considered whether to exempt companies and individuals that own 15 or more properties or more (or make bulk purchases of 15 properties more) from the surcharge. However, the Chancellor confirmed in his 2016 Budget that these larger landlords would in in fact be liable for the extra tax.
Can I set up a limited company to avoid the surcharge?
The Government has a keen eye on preventing tax avoidance. So you won't be able to escape it by setting up a limited company and buying an additional home that way.
Are there any exemptions?
You won’t pay the 3% surcharge on second homes that cost under £40,000. Caravans, mobile homes and houseboats are also exempt. It's also worth bearing in mind that if you are charged Capital Gains Tax on any profit you make on the sale of an additional home, the 3% surcharge can be offset against your bill.
Can I just omit to tell my solicitor about the fact I already have a property?
Solicitors and property lawyers are under instruction to ask buyers outright if they already own another property. If you don’t answer truthfully it’s tantamount to fraud and potential penalties could be a lot worse than meeting the cost of a 3% extra Stamp Duty.
INFORMATION IS CORRECT AT THE TIME OF WRITING AND IS PROVIDED AS GUIDANCE ONLY. IT DOES NOT CONSTITUTE LEGAL OR FINANCIAL ADVICE.