Guest Blog – Zoopla Q&A: New 3% Stamp Duty surcharge on second homes
As of 1 April, 2016 you have to fork out an extra 3% in Stamp Duty if you are buying an additional home. Find out how the new tax loading works with Zoopla’s Q&A.
Q. What is the 3% Stamp Duty surcharge?
A. It’s a 3% loading on existing Stamp Duty rates, which are set out on the table below:
Q. Who has to pay it?
A. Anyone who is buying an additional residential property. This could mean a holiday home buy-to-let or even a main residence you plan to live in (more detail on this later).
The higher rate tax applies to property in England, Wales, Northern Ireland and – under a separate announcement in the Scottish Government’s 2015 pre-election Budget – in Scotland too.
The surcharge applies even if the home you already own (or even part-own) is overseas. So, if you have a ski chalet in Bulgaria and are buying your first home in the UK, you’ll still be stung with the extra tax.
Q. When did it kick in?
A. The new surcharge took effect from 1 April, 2016, but it was first announced in the Chancellor’s 2015 Autumn Statement Spending Review. To avoid paying it, you’d have had to complete (not just exchange) on any second home purchase by midnight on 31 March, 2016. (Unless you’d already exchanged on or before 25 November, 2015, the date when the new tax was announced in the Chancellor’s Spending Review).
Q. How is the tax charged?
A. Regular Stamp Duty is, these days, charged on a tiered basis (so you only pay the higher rate on the slice above any threshold – the same as income tax). But the 3% surcharge still effectively works as a slab tax. In other words, the 3% loading applies to the entire purchase price of the property.
Q. How much does that translate into?
A. As an example, if you are buying a second home with a purchase price of £300,000, just the extra 3% Stamp Duty would equate to £9,000 (3% of the entire price). This is in addition to the £5,000 regular Stamp Duty bill on a home of this value, bringing the total payable an eye-watering £14,000.
To get an overall Stamp Duty figure on a second property, work out the regular cost first with our handy calculator. Then calculate 3% of the purchase price and add the two figures together.
Q. What if the home I am buying will be my main residence?
If the home you are buying directly replaces your main residence, you will not be liable for 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.”
But replacing your main residence means the last one will need to be disposed of (ie, SOLD or GIFTED). If you are moving out of rented accommodation (or your parents’ home) this will NOT count as disposing of your main residence as your name is not on the property deeds.
Q. What if I need to buy another main residence before I can sell my last one?
A. If you move out of your main residence (Home A) but keep it and buy another main residence (Home B), you will have to pay the 3% Stamp Duty surcharge initially. However, so long as you sell Home A within 36 months (increased from 18 months in the March 2016 Budget) of completing on the purchase, HMRC will make a full refund.
In fact this refund applies on the disposal of ANY previous main residence within 36 months, even if the property’s been rented and you haven’t lived in it for years.
Q. How will the refund work?
A. We are still waiting on final details on this from the Treasury. But it’s likely that the refund will be triggered automatically on the sale of your previous main residence (so long as it’s within 36 months of the completing on your new one). Once this trigger has been set in motion, the refund should be immediate.
Q. What if I sell my main residence but I’m not able to buy another one straight away?
A. In some cases, (for example, if you are moving back to the UK after living abroad), you may have to sell your main residence but move into a ‘stop gap’ before you can buy a new one. In this case, the Government will offer a ‘grace period’ of 36 months (increased from 18 months in the March Budget) during which time the purchase of your next main residence will NOT be subject to the 3% surcharge.
To make it fair to people who had already sold their main residence before the Autumn Spending Review when the higher-rate tax was announced, the 36-months will start ticking from 25 November 2016 and not from the date of the sale completion.
Q. What if I already own a property, but I’m buying with someone who doesn’t?
A. Unfortunately even if just one of you already owns a home (whether you are living in it or not), when you go to buy another one together, the 3% Stamp Duty surcharge will apply.
For couples NOT currently living together, it may be possible to get around this by putting the new home solely in the name of the partner who doesn’t already own:
“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, allow two names on the mortgage, while putting just one on the property deeds.”
However, HMRC tax avoidance provisions ware likely to catch out couples who are already living together – even if they are unmarried.
Q. What happens if I’ve split from my partner but my name’s still on the deeds of our home?
A. If you are separated or getting divorced and want to buy a new home to live in but your name is still on the deeds of your previous home (which is NOT being sold), this will constitute buying an additional property which means the 3% surcharge will initially apply. However, if you go onto sell your share of the home back to your former partner within 36 months of completing, HMRC will provide a full refund.
Q. Will HMRC link me to a partner that I’m separated from but still legally married to?
A. After the March 2016 Budget, the Government confirmed that married couples who are living separately in circumstances that are likely to become permanent will NOT be treated as one unit for the purposes of the 3% surcharge. In other words, if you are buying a home that only incurs the 3% surcharge on the basis of your legal spouse’s situation, you won’t have to pay it.
Q. Can I avoid the surcharge by setting up a limited company?
A. The Government has a keen eye on preventing tax avoidance with this levy, so you won’t be able to escape the surcharge by setting up a limited company for the purpose of buying an additional home or homes.
Q. What if I already have a limited company?
A. The surcharge will still apply when buying additional homes through an existing limited company.
Q. What if the home I want to buy has a ‘granny annex’?
A. The 3% surcharge was initially going to be applied to any annex or additional property purchased alongside a main residence if it had a value of more than £40,000 and 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 made an amendment to the Finance Bill to reverse this. Now, 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.)
The Treasury explained: “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 may have already paid the extra surcharge under these circumstances since 1 April, 2016, will have it refunded.
Q. What if I am a major property investor?
A. It was confirmed in the 2016 Budget that major investors in residential property will be liable for the 3% surcharge. (In its initial consultation, the Government had earmarked ‘bulk buyers’ of 15 or more residential homes for exclusion as they were deemed to be ‘contributing towards new housing supply’.)
Q. Can I just omit to mention to my solicitor about the fact I already have a home?
A. HMRC has instructed the country’s solicitors and property lawyers to ask buyers the question outright of whether they already own another property. If you don’t answer truthfully it’s tantamount to fraud – penalties for which could be a lot worse than a 3% Stamp Duty loading.
Q. What if I inherit my property?
No Stamp Duty is payable on properties that are inherited, so the 3% premium will not be relevant. However, if you have inherited a property and go onto purchase an additional home without selling it, you will be hit with the surcharge.
The March 2016 Budget did hold some reprieve on inherited properties, however. The Government confirmed that a small share (50% or less) in a single property which had been inherited within 36 months prior to buying another home (which would otherwise attract the 3% surcharge) will NOT be considered as an additional property.
Q. Are there any exemptions?
A. You won’t pay the 3% Stamp Duty surcharge on second homes that cost less than £40,000 (see 6 homes on Zoopla for under that budget), or on caravans, mobile homes and houseboats.
Social landlords and charities won’t be charged the 3% loading.
And, while it’s not an exemption, it’s worth noting that if you pay Capital Gains Tax on the sale profits of an additional home, you can offset the cost of the 3% Stamp Duty surcharge against your bill.
Q. Do plots of land count?
A. Just like regular Stamp Duty, the 3% loading will only apply to purchases of residential property. A plot of land (even if it will subsequently be used for a home) is not counted as residential, so the surcharge will never apply.
Similarly, if you already own a plot of land and are buying an additional property, it will not be considered for purposes of the higher tax.
Q. What about timeshare homes?
A. According to HMRC, an overseas timeshare home will only be considered for the purposes of the higher rate Stamp Duty if it is a dwelling AND you have a share in ownership which is equivalent to either a freehold or a lease with a term of more than seven years. However, as many timeshare deals are contractual agreements to occupy a property that is owned by another person, this will not be relevant.
Q. Is all this set in stone?
Yes. The final policy design was announced in the Chancellor’s Budget on 16 March and it kicked in as planned on 1 April 2016.
Q. What’s Zoopla’s view?
The Chancellor’s decision to go ahead with plans to introduce a further 3% increase in Stamp Duty on buy-to-let properties and second homes, is the latest in a series of short-sighted policies aimed at the property market.
Zoopla’s Lawrence Hall said: “The Stamp Duty on buy-to-let properties will ultimately make renting more expensive – which in turn eats into people’s ability to save towards a deposit. In an attempt to reduce demand by some buyers, it ignores the fact that the private rental sector provides is an essential service for millions of adults who are happy to rent, especially in their 20s and 30s.
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