Since April 2016, owners of second homes in England and Northern Ireland will have to pay an additional rate of stamp duty. The rate applies to both leasehold and freehold properties, particularly those costing over £40,000. This is applicable whether you are purchasing the property outright or with a mortgage. You will also be required to pay the new Stamp duty rate even if the property in question is abroad. This extra rate of stamp duty also applies to individuals who only own a share in a second home. This article highlights everything that you should know about stamp duty on second homes, including who it affects and how it can be avoided.
The Cost of Stamp Duty for Second Homes
The extra rate on stamp duty is a flat 3% levied on top of the current rates of all the properties worth more than £40,000. For example, if you are purchasing a second home selling at £200,000, then you will pay the 2% normal stamp duty charge plus the extra 3%. However, this rate does not affect the purchase of mobile homes, caravans, or houseboats. Here is a guide on the cost estimates of the stamp duty rates for purchasing second homes.
|Normal Stamp Duty Rate
|Total Stamp Duty Rate after the Extra Rate
|£1.5M and above
|£925,000 to £1.5 M
|£250,000 to £925,000
|£125,000 to £250,000
|£40,000 to £125,000
Take note that a delayed sale of one’s previous main residence after buying a new one is considered to be default possession of a second home. This means that failure to sell your first home within the first three years of purchasing a new property will see you pay the extra 3% stamp duty. This is because the property pending to be sold is still registered as your property.
Properties Exempted from the Extra Stamp Duty Rate for Second Homes
The extra 3% stamp duty rate due since April 2016 is levied on all second homes worth more than £40,000. However, there are a few scenarios where homeowners are exempted from paying the additional stamp duty charge. These cases include the following;
- When you are purchasing a houseboat, caravan, or any mobile home, regardless of their value.
- When you are purchasing a second home worth any amount below £40,000.
- When you buy a new main residential home, provided you have intentions to sell your current home.
Claiming a Stamp Duty Refund
If you are not exempted from paying stamp duty for your second home, you can claim for a stamp duty refund. Claiming a stamp duty is valid only if;
- You sold your old main residential property within three years of purchasing your new main residence.
- You paid stamp duty for the second home by mistake.
- You apply for the stamp duty refund 12 months after the filing date of the Stamp Duty Land Tax returns.
- You apply for the stamp duty refund 3 months after selling your old main residence.
To get your stamp duty refund, you will be required to submit your tax details to the Her Majesty’s Revenue and Customs (HMRC) department. This process can be done online via the department’s website. Here are some details you will need to provide;
- The amount you wish to claim back.
- The total stamp duty you paid.
- The address of the old main residential home that you have sold.
- The address of the home for which you paid the additional stamp duty charge.
Within 15 working days of applying for the stamp duty refund, HMRC will wire the money back to you upon approval.
Defining Main Residential Home
Unlike the other forms of tax payments, homeowners do not have the luxury to choose which of their properties is the main residential home for stamp duty purposes. As far as paying stamp duty is concerned, the house you are currently living in is considered to be your main residence. However, if homeowners spend more time in several homes, then HMRC is mandated to determine which of these homes is your main residence.
Here are some of the factors considered by HMRC to establish the main residential home.
- The property located within the region where you are a registered voter.
- The home in close proximity with your children’s schools.
- The region where you are a registered professional, such as a doctor.
- The location where your family spends most of their time, particularly if you are married.
Should First-time Buyers Pay the Additional Stamp Duty?
It is technically impossible for a first-time buyer to purchase a second home. However, if you are purchasing a buy-to-let property for the first time, you will not be surcharged the 3% extra rate. The rate is only applicable to second homes in reference to being residential homes.
The following are factors that will subject first-time buyers to the extra stamp duty rate;
- If you have a share in another home.
All individuals with a share on a specific property are considered to be a single unit by the HMRC. This means that if one of the shareholders owns a buy-to-let property while another one purchases a new property, then the extra stamp duty rate will apply.
- If you have inherited another property.
If someone leaves property to you as an inheritance while you already own another home, the stamp duty rate for second homes will apply. This is particularly applicable when the inherited property values at over £40,000. Also, if you inherit a property and become its sole owner, then you will be subjected to the additional stamp duty charge if you buy another property.
However, you may be exempted from the stamp duty on a second home if you only inherit a share of a property. This means that if you purchase a new property after inheriting 50% or less share of a property, then you will not be subject to the extra 3% stamp duty rate.
- If you are jointly buying a property with someone who already owns another home.
Unfortunately, if you are jointly buying a property with a person owning a home, then you will be subjected to the stamp duty for second homes. However, you may be exempted from this extra rate only if the other person intends to sell their main residence. To avoid paying stamp duty for a second home under this scenario, the two of you can agree to buy the property under your name. This can be effective, provided the two of you are not married or in a civil partnership.
Does Stamp Duty Apply on Second Homes when Purchasing a Property for Your Children?
As long as your name is included in the children’s property’s title deed, then you will be required to pay the extra charge if you are an already existing homeowner. However, this can be avoided through the following ways;
- Acting as a Guarantor. HMRC does not class guarantors as owners of the property in question. This means that your position as a homeowner does not influence your purchase of property for your children.
- Acquiring Family Offset Mortgage. This involves identifying a mortgage lender and opening an account with them for your savings. The lender acts as a deposit, while you solely remain to be the owner of the money. Upon purchase of the children’s property via the lender, you will not be subjected to the stamp duty on the second home.
- Ownership transfer. You can directly purchase a property under the child’s names or transfer the home’s ownership via a Trust. This way, you will be free of the extra stamp duty as you are considered to be the owner of the new property.
Owning a Property Abroad?
If you buy a new property while you own another home abroad, then you will be liable for the additional stamp duty on second homes. Getting a home in the UK for the first time is considered to be a second home if you already have another property outside the country.
Buying a New Property as a Divorcee?
Special legislative rules are used when it comes to the application of stamp duty to new properties purchased by a divorcee. Here are two of the most common rules that you should expect to face if you are buying a new property as a divorcee;
- Divorce Under a Property Placement Order
In some cases, a divorcee may file for transfer of their marital home in court through the Property Placement Order. In this case, the divorcee handing over the home will not be subjected to the additional 3% stamp duty rate if they purchase a new home.
- Divorce Devoid of a Property Placement Order
If you get a divorce without organising a Property Placement Order, then the 3% stamp duty rate will be applied upon purchasing another home. In such cases, often, the divorcees continue to have a part-share to the property in question. You are, therefore, considered to be an owner of another property. However, you can apply for a stamp duty refund once you sell your share of the marital property. This must be done within the thresholds provided by HMRC on a stamp duty refund.
Stamp Duty on Lease Extensions
Lease extension refers to the process of adding more time on top of the period stipulated in a leasehold agreement before the ownership of the property gets transferred to the owner. Just like purchasing a new property, paying for stamp duty applies to leasehold extensions. According to the new rules set out by the Stamp Duty legislation established in April 2016, extending your lease may require you to pay the 3% extra stamp duty rate.
The additional stamp duty rate is levied on an extended lease on the following conditions;
- You are an owner of another residential property worth more than £40,000 in the UK.
- The premium for the new lease exceeds the £40,000 value.
- The new lease runs for over 7 years.
The issue with paying stamp duty on lease extensions is that the more premium you pay while you own other properties, the higher the chances of paying the additional stamp duty rate. Here are two cases that influence a high rate of stamp duty on lease extensions.
- Principal Private Residence
This refers to a case where your residential lease is extended for up to 90 years with a premium of over £40,000. The home becomes your Principal Private Residence, and it is not subject to the extra stamp duty charge.
- Buy-to-let Residence
This refers to the extension of a residential lease for up to 90 years a premium of over £40,000. In this case, the property is considered to be rented, and the additional stamp duty rate of 3% is payable. However, if such a lease for such a property is extended at a premium below £40,000, then the extra stamp duty rate is not applicable. Also, an extension of the lease on an individual’s main residence is exempted from the extra stamp duty rate.