Sarah Bradford outlines the relief from the stamp duty land tax supplement where a property is purchased to replace the main residence.
Stamp duty land tax (SDLT) applies on the purchase of property in England and Northern Ireland. SDLT does not apply to property purchases in Scotland and Wales – instead, land and buildings transaction tax (LBTT) applies in Scotland, and land transaction tax (LTT) applies in Wales.
It applies both to the purchase of freehold and leasehold properties. Where the property is a leasehold property, it applies to the purchase price of the lease (the lease premium).
An SDLT return must be filed and the SDLT paid within 14 days of the ‘effective’ transaction date. This is normally the completion date.
Residential rates
As far as residential property is concerned, where the purchaser will only have a single property after the transaction completes, SDLT only applies where the purchase price is more than £250,000. A higher threshold of £425,000 applies to first-time buyers purchasing a property costing £625,000 or less.
A supplement applies to second and subsequent residential properties. For SDLT purposes, the supplement is set at 3%. It applies on top of the normal residential rates and is payable where the consideration for the property is £40,000 or more. Consequently, where a purchaser purchases a second or subsequent residential property for at least £40,000, there will be some SDLT to pay, even if the purchase price is less than the residential threshold of £250,000.
SDLT is charged at the appropriate rate on the relevant ‘slice’ of the consideration. The current residential rates are shown in the table below.
|
Chargeable consideration |
SDLT rate Single property |
SDLT rate Second and subsequent properties |
|
Up to £250,000 |
0% |
0% where consideration is £40,000 or less 3% where consideration is more than £40,000 |
|
£250,001 to £925,000 |
5% |
8% |
|
£925,001 to £1.5m |
10% |
13% |
|
Above £1.5m |
12% |
15% |
Example 1: Sale of old residence and purchase of new one
Richard buys a new home for £700,000, having sold his previous home. After the transaction completes, he will own one property. SDLT is charged at the standard residential rates and is calculated as follows:
0% on the first £250,000 = £0
5% on the remaining £450,000 = £9,000.
Richard must therefore pay SDLT of £9,000 on the purchase of his new home.
Application of the supplement
Higher rates of SDLT apply to purchases of additional residential properties. A 3% supplement applies to the purchase of investment properties and second homes and is usually charged where, after the completion, the purchaser will own more than one residential property.
Example 2: Purchase of buy-to-let property
Paul is a buy-to-let investor. In addition to his own home, he owns eight investment properties. He purchases a further residential property for £550,000 to add to his portfolio. As he owns more than one residential property, the supplement applies and SDLT will be charged at the higher residential rates as follows:
The first £250,000 @ 3% = £7,500
The remaining £300,000 @ 8% = £24,000
Consequently, Paul will need to pay SDLT of £31,500 on the purchase of his latest investment property.
For comparison, had Paul only owned one property after the purchase and paid SDLT at the standard residential rate, his SDLT bill would have been £15,000 (i.e., £300,000 @5%). The supplement increases the amount of SDLT payable by £16,500 (i.e., £550,000 @ 3%).
Exchanging the main residence
Relief from the SDLT supplement is available where a person who has two or more properties at the point at which the purchase completes replaces their main residence.
In a situation where the former main residence has been sold when the sale of the new main residence completes, SDLT is charged on the purchase of the new main residence at the standard residential rates without the application of the supplement, even if the purchaser has other residential properties.
Example 3: Sale of former home and purchase of new home on the same day
Judy owns a holiday cottage in addition to her main residence. Following a change of job, she moves to a different area of the country, selling her former home and purchasing a new home for £1.2m. The sale and purchase complete on the same day.
Although following the completion of the purchase of the new main residence, Judy owns two properties, as she has sold her former main residence when she completes on her new home, the supplement does not apply – she has replaced her main residence with a new main residence.
The SDLT payable on the purchase of her new main residence is calculated at the standard residential rates as follows:
£250,000 @ 0% = £0
The next £675,000 @5% = £33,750
The remaining £275,000 @ 10% = £27,500
Judy therefore pays SDLT of £61,250 on the purchase of her replacement main residence.
Where a main residence is replaced and the purchaser has more than one residential property after the completion, the standard rates (rather than the higher rates) only apply where the former main residence has been sold before the completion of the new main residence.
If. instead, the sale of the former main residence does not complete until after the completion of the purchase of the new main residence, the supplement applies, even if the purchaser has no other properties – at the time of the completion of the new main residence they will own at least two residential properties as they will own both the new main residence and the former main residence.
In this situation, SDLT is initially payable at the higher residential rates. However, if the former main residence is sold within 36 months of the date of completion of the new main residence, the purchaser can apply for a refund of the supplement.
Example 4: Refund of SDLT supplement
Alison purchases a new main residence for £1m. As the sale of her former main residence has fallen through, she completes on the sale of her new home before completing on the sale of her old home. She has no other properties.
Although she is replacing her main residence, on the day she completes on the purchase of her new home, she owns two residential properties, as the sale of her former main residence has yet to go through. She must therefore pay SDLT at the higher rates initially on the purchase of her new home.
The SDLT is calculated as follows:
The first £250,000 @ 3% = £7,500
The next £675,000 @ 8% = £54,000
The remaining £75,000 @ 13% = £9,750.
Alison must therefore pay SDLT of £71,250 when she completes on her new home.
Alison finally sells her former home eight months later. She can claim a refund of the supplement of £30,000 (i.e., £1m @ 3%). Consequently, she has ultimately paid SDLT of £41,250 at the standard residential rates, calculated as follows:
£250,000 @ 0% = £0
The next £675,000 @ 5% = £33,750
The remaining £75,000 @ 10% = £7,500
Applying for a refund
Where the former residence is sold within 36 months of the completion date of the replacement main residence, the purchaser can apply for a refund of the SDLT supplement. An application can be made online (at www.gov.uk/government/publications/stamp-duty-land-tax-apply-for-a-repayment-of-the-higher-rates-for-additional-properties).
The application must be made by the later of 12 months from the date of the sale and 12 months from the date of the filing date of the SDLT return for the replacement main residence. The SDLT supplement will not be refunded where the claim is made after the deadline.
This rule allows a person to keep the former main residence and let it for (say) two years and then sell it but still claim the SDLT supplement paid on the sale of the replacement main residence.
Former main residence sold after more than 36 months
In exceptional circumstances, it still may be possible to claim a refund on the SDLT supplement paid on the purchase of a replacement main residence where the sale of the former main residence does not take place until more than 36 months after the completion of the new main residence. To claim a refund, it is necessary to write to HMRC explaining why the sale did not complete until more than three years after the purchase of the replacement home.
However, it should be noted that ‘events which normally occur when buying and selling property are not treated as exceptional circumstances’. This might include the inability to find a buyer at the desired price, a delay in agreeing terms with the buyer or the chain breaking. ‘Exceptional circumstances’ are those outside the seller’s control, such as government sanctions or action taken by a public authority stopping the sale.
Practical tip
If a former main residence is sold within 36 months of the completion of the new main residence, the SDLT supplement can be reclaimed, even if the former main residence was let in the interim.
