Understanding the 3% stamp duty introduced in April 2016

The Stamp Duty Land Tax surcharge of 3% was introduced by the government in April 2016 for any additional properties, but what does it mean and how will it impact you?

Q. What is the Stamp Duty Land Tax (SDLT) surcharge?

A. It is an extra 3% charge on previous Stamp Duty rates for any additional properties you own. Previously property purchases below £125,000 were exempt from Stamp Duty, but now the tax is charged at 3%.

Similarly, rates on purchases between £125,000 and £250,000 have gone up from 2% to 5%, rates on property purchases between £250,000 and £925,000 are up from 5% to 8%, rates from £925,000 to £1.5m have been raised to 13% from 10% and rates on homes valued over £1.5m are up from 12% to 15%.

A buyer is charged Stamp Duty on the whole of the purchase. It is tiered so that someone buying a home for £750,000 would only have to pay 3% on the first £125,000. They would then pay 5% on the amount between £250,000 and £750,000.

Q. When did the new rates start?

A. The new surcharge rates began on 1 April, 2016 after being announced in the Chancellor’s Autumn Statement in December 2015. To avoid the higher taxes property purchasers had to complete, not just exchange on second home purchases by midnight on 31 March 2016. This was the reason for the rush of purchases that were completed before the end of March 2016.

Q. Who does it apply to?

A. The new tax rates apply to anyone who is buying a second home that costs £40,000 or more. This covers holiday homes, buy-to-let or even a main residence in some circumstances, for instance if you already own a share in another property if it is worth more than £40,000. It applies to property purchases in England, Wales and Northern Ireland but the rules in Scotland are slightly different and were announced in Scottish Government's 2015 pre-election Budget. Details in this Q&A relate to the rules governed by HMRC in England, Wales and Northern Ireland.

The new rules apply to properties anywhere in the world, so if you have a holiday home overseas or a part share valued at more than £40,000 the new Stamp Duty tax rules will apply.

Q. How much Stamp Duty is payable?

A. If you are buying a second home for £400,000, the extra Stamp Duty surcharge would cost £12,000. The total bill would be £125,000 x 3% = £3,750 plus the remaining £275,000 at 5% = £13,750, so £17,500 in total.

Q. What if the new property is my main residence?

A. If you are buying a different home that replaces your main residence, the extra 3% charge doesn’t apply, even if you own additional properties as a buy-to-let or a second home because the new transaction is a replacement of your main home.

If you buy a new property that will be your main residence but you have yet to sell your previous main residence, you will be liable for the extra 3% surcharge but as long as you sell your previous main residence within 36 months HMRC will give you a full refund on the extra Stamp Duty paid.

Q. What if I already own a property but the person I’m buying with doesn’t?

A. Although this seems unfair, the rules state that even if just one of you already owns a property as a main residence, the 3% Stamp Duty surcharge is likely to apply to the full amount, unless this is a replacement of one half’s main residence.

However, if you are not married you can get around this by putting the new home in the other person’s name. HMRC have confirmed that doing this is not tax avoidance. However, this is a risky strategy because if you were to split up, the legal title would be with one partner not both.

Q. What about if I am going through a divorce but have not yet sold the matrimonial home?

A. If you are in the process of getting a divorce and the home you used to share with your husband or wife has not yet been sold and you still have a share valued over £40,000 and the previous home is not being sold, the tax charge will apply as this is defined as buying an additional property.

But once you sell your share back to your partner or you both sell the house entirely, HMRC will provide a full refund as it will constitute a replacement of a main residence. However, you need to be careful about this because if you buy a new residence before the sale of the interest you have in the previous home, you need to sell your share within three years but also you must have lived in that home as your only or main residence for some of that three year period.