Stamp duty when purchasing residential properties

It is just over a year since the additional rates of stamp duty were introduced. From 1 April 2016 an additional 3% Stamp Duty Land Tax (SDLT) applied when a person or couple purchases a residential property and more than one property is then owned by that person or couple.

SDLT is charged on the portion of the cost of a property that falls into various bands.

Band___________________Rates applied to one property______Additional property rates
£0 – £125k______________________________0%________________________3%
£125k – £250___________________________2%________________________5%
£250k – £925k___________________________5%________________________8%
£250k – £1.5m___________________________10%_______________________13%
£1.5m plus______________________________12%_______________________15%

Transactions under £40,000 do not require a tax return to be filed with HMRC and are not subject to the higher rates.

Exemptions
1.The higher rates will not apply if at the end of the day of the transaction an individual owns only one residential property. That property may be used for any residential purpose.
2.If a person owns more than one property at the end of the day of a transaction, the higher rates will not apply if they have replaced a main residence. Individuals will not be able to elect which of their residences is their main residence, as they can for capital gains tax purposes.

When can the additional 3% SDLT be reclaimed?
If a residential property is purchased to replace a main residence, but that previous main residence has not been sold at the end of the day of the transaction, then the additional 3% SDLT will be payable on the purchase. However, this will be refunded if the previous main residence is sold within 18 months of the transaction.

How to decide which property is the main residence
HMRC will take into account a number of factors when considering whether a given property is an individual’s main residence. These include:
• where the individual and their family spend their time
• if the individual has children, where they go to school
• at which residence the individual is registered to vote
• where the individual works
• the location and degree of furnishing and location of moveable possessions
• the correspondence and registration addresses given to various organisations.

The government proposes a two stage test to determine whether a purchase of a residential property is a replacement of a main residence or not.

Stage 1
Whether, at the time of the transaction, a property sold in the last 18 months was the only or main residence of the individual. When considering the first stage of the test, the property being sold must have been the only or main residence of the purchaser at some point in the 18 months before the purchase of the new property. In the majority of cases, an individual owns only one residence throughout a period, and it is this residence that will be their only or main residence.

Stage 2

This second stage of the test is prospective and based on whether the purchaser intends to use the newly purchased property as their only or main residence. Where an individual has made plans at the date of purchase to move into the new property as their only residence, it will be obvious that the intention test is met.

Where evidence clearly shows that either another property will continue to be their main residence or that the property is purchased for some other purpose (such as use of a buy-to-let mortgage or other evidence of an intention to market the property for rent) the transaction will not be a replacement of a main residence.

Married couples and civil partners
For the purpose of determining the rate of SDLT to be applied married couples and civil partners will be treated as one unit. Therefore married couples and civil partners who own one property at the end of the day of a transaction will not pay the higher rates of SDLT. However, if either of them owns more than one residential property or if they each own one residential property then the higher rate of SDLT may be payable when purchasing another property.

Married couples and civil partners are treated as living together, and therefore as one unit, unless they are separated:
• under a court order; or
• by a formal deed of separation executed under seal.

In each case the marriage or civil partnership must have broken down. Where a married couple or civil partners sometimes live apart, but the relationship has not broken down, then they will be treated as one unit. Which property is the couple’s main residence will be determined by the facts.

Legislation
These higher rates were introduced by the Finance Act 2016 sections 127 to 133.

Further guidance
HM Treasury has issued further guidance on this subject.