New stamp duty rules explained

The changes to the stamp duty rules for additional properties have finally been confirmed by the government with some modifications in response to previous criticisms. Although the intention of the policy is to reduce distortion of the housing market, some of the new rules may create problems for ordinary home buyers.

Kevin Gauntlett, Head of Residential Conveyancing, explains the main changes to the stamp duty rules and who will be affected.

Stamp duty land tax (SDLT) is paid on all house purchases above £125,000 on a sliding scale. From 1 April 2016 anyone who already owns a residential property will have to pay an extra 3 per cent SDLT if they buy an additional residential property.

Additional residential property

Anyone who owns only one residential property at a time is not affected. Where someone buys an additional residential property, the key test is whether it is intended to replace the buyer’s previous main residence.

If it is, and the previous main residence is being sold at the same time or was sold in the preceding three years, no additional SDLT is payable. Otherwise, the higher rate will apply.

Where anyone owns more than one residential property, the decision as to which one is the main residence will be based on fact. There is no scope for the property owner to make an election, as they can for capital gains tax. This could mean that a different property is treated as the main residence for each of these taxes.

The new rules are wide-ranging, catching buy-to-let residential property and furnished holiday lettings as well as owner-occupied property. In deciding whether a new residential property purchase attracts the higher rate of SDLT, any residential property already owned anywhere in the world is counted.

The rules are complex and property owners will need specialist legal advice to make sure they pay the right amount of tax.

Bridging provisions

Anybody moving from one main residence to another, but who has to complete on the purchase of the new property before the original one has been sold, will be caught by the new rules. They must pay the higher rate of SDLT on their purchase. However, if the original property is sold within three years, they can have the additional SDLT refunded but this will clearly have cash flow implications.

Married couples

Married couples and civil partners may have only one main residence between them. Any additional residential property either of them purchases, jointly or separately, will attract higher-rate SDLT, unless their former main residence is sold within three years. The government recognises that the new rules may cause difficulty where a relationship breaks down, so separated couples can be treated separately for SDLT purposes in some circumstances. Anyone in this position should take legal advice.

Unmarried couples

Property purchased in joint names outside a marriage or civil partnership will also be subject to higher-rate SDLT. This could disadvantage someone purchasing their first residential property jointly with someone who already owns a residential property.

Parents helping children

The changes will also affect parents who commonly purchase jointly with their children when trying to help them to get onto the property ladder. From April, higher-rate SDLT will be payable in these circumstances, unless the parents sell their own main residence.

Inherited property

Inheritance and trusts are also areas where property owners will need specialist legal advice. No SDLT is charged when property is inherited and this will not change. However, inherited property may be taken into account in deciding whether an individual owns more than one residential property, depending on the size of that person’s share and when it was inherited. Where property is held on trust, the rules are complicated.

Company owned property

The new regime affects property purchased by companies as well as individuals and even the first purchase of a residential property by a company will attract higher-rate SDLT. The government was expected to recognise the role of large-scale investors in the housing market by giving an exemption for bulk purchases of residential properties but it has decided not to do so.

The transitional provisions mean that, generally, the higher rates of SDLT will not apply where contracts were exchanged before 26 November 2015, as long as the contract is not assigned or varied.

Like much tax law, this is a complex regime and many property owners will now need specialist advice about the SDLT consequences of buying residential property.

If you are buying a residential property, contact Kevin Gauntlett.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.