The Tax Landscape

If you own a second home, you are a target for law and policy makers who view you as a sitting duck for tax gouging and worse, possible expropriation.  Labour is looking to double the Council Tax on second homes and, if they attain power, may force landlords to transfer their homes to their tenants at the same discounts available to council tenants.  But it’s not only Labour who see second home owners as a social evil. The Conservatives have already hit second home owners with a costly restriction on the mortgage interest they can claim for income tax on the rent received from letting [see here] and in April, 2016, they introduced a crippling 3% additional stamp duty hit on the purchase of an additional residential property.  The term “crippling” is not hyperbole.

The stamp duty on a second home purchased for £175,000 is £6,250 instead of £1,000; a £2m attracts £213,250 instead of £153,750 and a £5m purchase attracts £663,750 instead of £513,750.  Ironically, this only encourages renting, inhibits upward moves and drives up rents, reducing renters’ ability to save for a deposit.

How Much is Stamp Duty on a Second Home?

You can use HMRC’s stamp duty calculator to work out the second home stamp duty rates in England and Northern Ireland.  Other stamp duty calculators are available, for example, see here and here.

The charge is 3% above the normal SDLT residential rates and is charged on the slices of the price of the property that fall into each rate band. The rates are set out in an alternative ‘Table A: Residential’ that is substituted for the normal Table A in Finance Act 2003, s 55(1B), for when there is a higher rates transaction and the following table shows a comparison of the rates in both versions of Table A:

BandBasic residential SDLT rates
Additional SDLT rates
£0–£125k0%3%
£125k–£250k2%5%
£250k–£925k5%8%
£925k–£1.5m10%13%
£1.5m+12%15%

Transactions under £40,000 do not require a tax return to be filed with HMRC and are not subject to the additional charge.

When entering the code for “Type of property” in the SDLT return, Code 04 should be used instead of Code 01 when the higher rates for additional dwellings apply.

Acquisitions of mixed residential and non-residential property remain exempt from residential rates and do not attract the 3% additional charge and are charged under the rates in Table B also using the ‘slice’ system with a maximum rate of 5% for consideration above £250,000. 

In a case where the acquisition of a new dwelling will become a replacement for the purchaser’s only or main residence but the latter has not been disposed of at the date of acquisition of the new dwelling, the acquisition is initially treated as a higher rates transaction. However, the acquisition of the new dwelling ceases to be a higher rates transaction if the previous or only main residence is disposed of within three years beginning with the day after the effective date of the acquisition of the replacement dwelling. [FA 2003, Sch 4ZA, para 3(7)]. In such cases, a disposal that causes an earlier purchase to cease to be a higher rates transaction cannot also make a later purchase into a replacement of a main residence.  This rule creates a potential trap for a separating couple where one spouse buys a property before the jointly held main residence is sold and the other spouse buys a property after the sale of the jointly held main residence.  This is in contrast with where the jointly held main residence is sold first and each spouse buys their own property afterwards where each spouse can take advantage of the main residence replacement exception.  

When an acquisition of a dwelling ceases to be a higher rates transaction because of the subsequent disposal of the main residence, the time limit for amending the SDLT return for the acquisition of the replacement residence to notify HMRC that this acquisition has ceased to be a higher rates transactions is the period of 12 months beginning with the effective date of the disposal of the previous main residence or, if later, within 12 months of the filing date for the return relating to the replacement residence. [FA 2003, Sch 4ZA, para 8(3)]. These time limits are strictly enforced by HMRC. The normal requirement to supply HMRC with the relevant contract, etc with the notice of amended return is waived in relation in such cases [FA 2003, Sch 4ZA, para 8(4)]. The filing of such an amended return should lead to a repayment to the purchaser of the additional charge that was paid on the acquisition of the new dwelling. 

Further Reading

There is much more to the SDLT charge on second homes and you can read about it in depth here on this website.  You can also read a more general guide to stamp duty by the Money Advice Service here.

For advice in relation to stamp duty on second home ownership, contact Patrick Cannon today.

Patrick Cannon

2 October 2019

GET IN TOUCH

Make An Instruction

If you wish to instruct me please provide your details below and we will get back to you with the necessary documents.

Office Address

Old Square Tax Chambers
15 Old Square
Lincoln's Inn
London
WC2A 3UE