Will you be affected by the higher stamp duty rate on second homes?

Paul Lewis / 07 April 2016

New rules will mean buy-to-let landlords and people buying a second property will pay a higher rate of stamp duty land tax.



Parents who help their son or daughter buy a first home could trigger a tax penalty adding thousands of pounds to the cost.

They are just one of the groups who are caught by the higher rate of Stamp Duty Land Tax which now applies when someone buys an ‘additional’ home.

The new law, which began on 1 April, was designed to raise tax from buy-to-let landlords and people who bought a second home. But many other groups will be caught by it, including parents who help a son or daughter by becoming joint owners of their child’s home and those who buy a second property to be near their work.

Read our simple guide to Stamp Duty on first homes.

The new higher rate of Stamp Duty

The new rates of Stamp Duty Land Tax (SDLT) add thousands of pounds to the cost of a second home. If the price is £150,000 normal SDLT is just £500. But the tax on a second home is ten times as much – £5000. 

On more expensive property the difference is much bigger. Someone buying a half million pound home would pay £15,000 on a first home but double that – £30,000 – if it is their second property. The tax on additional homes adds 3% to the standard rates.

SDLT applies in England, Wales, and Northern Ireland. In Scotland a similar tax applies called Land and Buildings Transaction Tax (LBTT). That also has higher rates for second homes called Additional Dwelling Supplement. LBTT is higher than SDLT for any home – first or second – which costs more than £333,000.

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SDLT England, Wales, N. Ireland**

LBTT Scotland**

First home

Additional home

SALE PRICE

SALE PRICE

SDLT/LBTT

SDLT/LBTT

First £1 to £125,000

First £1 to £145,000

0%

3%*

From £125,001 to £250,000

From £145,001 to £250,000

2%

5%

From £250,001 to £925,000

From £250,001 to £325,000

5%

8%

From £925,001 to £1.5m

From £325,001 to £750,000

10%

13%

Amount above £1.5m

Amount above £750,000

12%

15%

*The tax does not apply to any property bought for less than £40,000. Once the price reaches £40,000 or more the tax is due on the whole amount. There is no exempt band.

**Neither tax applies to houseboats, mobile homes, or caravans.

Main residence

The new tax is normally due on any dwelling you buy which leaves you owning more than one home worth £40,000 or more. It applies to buy-to-let property, including furnished holiday accommodation, as well as a second home used for holidays or weekends or to be near your job.

If someone buys a home with a granny annexe that is a separate dwelling, then the whole transaction for both dwellings will normally be subject to the higher rates of SDLT. That could reduce the market value of a home where a granny annexe has been added. 

EDITOR'S UPDATE: The Government has promised to amend the new rules to ensure 'granny flats' will not be hit by the stamp duty rise. Saga's director of communications Paul Green commented: "This is a victory for common sense, Saga voiced concerns on behalf of worried over 50s and we are glad the Government have listened. The Chancellor is right to act to ensure that families can be confident that they wont be penalised for doing the right thing and looking after their parents at home." Read more about the Government's u-turn.

However, it does not apply if you are buying or replacing your main residence. That is defined as the place where you and your family spend your time, where your children go to school, where you are registered to vote, and where your letters are sent. You cannot choose or nominate your main residence – it is decided as a matter of fact.

If you buy a new main residence and sell the old one the new tax does not apply, even if you own other property. However, if you do not sell the old one then the higher tax is charged at the time of the sale because you own more than one home. 

If you sell the old home within 36 months (18 months in Scotland) the extra tax can be claimed back. If you have more than one property and sell your main residence, you have 36 months to buy another main residence without the tax being due (18 months in Scotland). After that the new property will count as an additional home and the higher tax will be due.

Someone who rents rather than owns their main residence can buy one home which they let out without paying the extra tax. But if they then buy a home to live in as their main residence that will be subject to the higher tax as they already own one property. People who own a second property will be liable for the higher tax if they sell it and buy another.

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Joint ownership

If a property is bought jointly by two people one of whom owns another residence but the other does not then the extra tax is applied to the whole price not just a share of it. 

A parent who wants to help a son or daughter buy a home will trigger the higher tax charge if they or their spouse own their own home and either of them becomes joint owner of the child’s home.

Many lenders will let a parent be a joint owner and jointly liable for the mortgage. But any percentage of ownership – even as little as 1% – will be enough to trigger the higher tax on the whole property. 

Some lenders will consider what are called ‘sole proprietor, joint borrower’ deals where the parent pays – or guarantees – the mortgage but their child is the sole owner. The higher tax will not apply in that case. Only Woolwich, Metro Bank and some smaller building societies offer those mortgages at the moment though more may do so in future. The higher tax will not apply if the parent’s home is used as collateral for the child’s mortgage.

Married couples and those in civil partnerships are treated as one person. So if one owns the home they live in and the other buys a separate property that will still be treated as an additional home and the higher rate of tax due. However, if a couple has separated and that situation is likely to become permanent then one partner can buy a property as a main residence without paying the extra tax. 

Unmarried couples are treated as two separate people. So if one partner owns one property and then the other buys a separate property that will not attract the higher rate of tax whatever it is used for.

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Payment

Stamp Duty Land Tax applies to property bought in England, Wales, and Northern Ireland; Land and Buildings Transaction Tax to property bought in Scotland. Under both regimes property anywhere in the world is counted when assessing liability to the higher rate. 

Every buyer now has to sign a form declaring any other property they own – including any property overseas. Foreign buyers will have to pay the extra tax when they buy a UK property if their main residence is abroad. Similarly, someone buying a second home in Scotland will pay the higher rate of tax if they own another property in England, and vice versa.

The tax is due within 30 days of the purchase. Normally, the lawyer or conveyancer arranging it has to complete the tax form and will collect the tax at the point of purchase and pass it to HMRC or Revenue Scotland. They are likely to err on the side of caution when it comes to assessing if the higher rate of tax is due.

For more tips and useful information, browse our money articles.

More information and tax calculators

For more information on SDLT in England, Wales and Northern Ireland, click here. 

For more information on LBTT in Scotland, click here.

For more information on calculating SDLT, read Paul's blog.

This article principally describes the rules for SDLT. The rules in Scotland for LBTT are very similar but may differ in detail. If you are buying a dwelling anywhere in the UK that is not your only residential property, get legal advice about whether the higher rate of tax will apply. 

Paul Lewis writes for Saga Magazine. Subscribe here.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.