New 3% Stamp Duty on Second Homes: Your Questions, Answered
As the government introduces a new levy for second homes, many property buyers have been left confused about the incoming policy, and how it affects their position. The final details are to be announced on the 16th March, so the infrastructure isn’t yet set in stone. However, the framework is unlikely to change vastly before the 1st April.
Liquid Expat Mortgages take a look at the new Stamp Duty surcharge on second homes, to help you get your head around the tax increase…
What is the new Stamp Duty surcharge?
From the 1st April 2016, there will be a 3% tax load on current Stamp Duty rates for those buying second homes. As a result, anyone buying an additional property up to the value of £125,000 will soon have to pay 3% Stamp Duty (up from 0%), 5% on properties up to £250,000 (an increase from 2%), and so on.
Who does it affect?
The new surcharge impacts homeowners, landlords and investors in England, Wales, Scotland and Northern Ireland, with a major impact on the buy to let market. If you are an existing property owner – whether or not that property is in the UK – you must pay this extra levy on additional property purchases in the UK.
If you are buying a property as a main residence, to replace your existing one outright, you will not be subject to the additional 3% loading. The government has proposed that, provided you sell the latter within 18 months, this will be refunded. However, if you are buying to let either of your two properties, you will be eligible for the Stamp Duty surcharge.
Exceptions to the rule include properties under £40,000, caravans, mobile homes and boats. The tax doesn’t apply to those inheriting property, unless you go on to buy a second home without selling the former.
When does it come into force?
The new surcharge was announced in the Autumn Statement on the 25th November 2015, and comes into effect on the 1st April 2016. Whilst properties exchanged before the Autumn Statement may complete at a later date, for all other purchases completion must occur by midnight on the 31st March. After this date, property purchases will be subject to the 3% extra tax.
How does the tax work?
As this tax applies to the total purchase price of the property, the 3% surcharge is effectively a flat tax. This differs greatly to the regular Stamp Duty, which is implemented on a tiered basis depending on the threshold of the property value.
So if you are buying a second home worth £250,000, you would be paying an extra £7,500 in tax, on top of the £2,500 regular Stamp Duty. This would bring your overall bill to £10,000, a staggering increase in taxation for property buyers and investors.
Are there any loopholes?
There are some possible ways around the new Stamp Duty tax. For couples where only one partner owns a property, the new home could be placed solely in the name of the other partner.
However, HMRC is well aware of this loophole, and will be clamping down on co-habiting couples who take this approach. Property solicitors and lawyers have been instructed to ask buyers whether or not they are existing property owners. Lying constitutes fraud, and could leave you liable for a penalty if you are found to be evading tax.
Meanwhile, the government will be on the lookout for individuals who try to avoid this charge by setting up a limited company to purchase additional properties. On the other hand, for property investors buying multiple properties (15+) at a time, these charges may be exempt, to encourage the growth of the housing market.
Should I act now to avoid the surcharge?
As the 1st April approaches, many investors are rushing to snap up property before the new levy comes into effect. Whilst it makes sense to avoid the 3% surcharge, particularly if you can find a chain-free, investor-friendly property, the deadline has created something of a gold rush on buy to let property. With prices artificially inflated, the benefits of buying before the end of March could be counteracted.
Putting it into perspective: case studies
To understand how the new Stamp Duty is likely to work in action, here are a few case studies on the tax implications of the policy, drawn from the advisors at Zoopla.
Q: My siblings and I inherited my late mother’s home, which is worth approximately £300,000. Would I have to pay the extra Stamp Duty to buy them out?
A: Not if this is the only home you own. However, if you were already a homeowner before your bereavement, you may be required to pay the surcharge to purchase the property outright.
Q: I currently own a flat, which I’m converting to a rental property. We plan to buy another property to move to as our main residence. Will I have to pay the levy twice?
A: No, you will only need to pay the 3% load for the additional property you are buying. Should you decide to sell your current property within 18 months, you could be reimbursed.
Q: My partner and I recently sold our property, and we’re currently renting a flat. We plan to buy a house, with the intention of renovating it to sell at a profit. Will we face the additional Stamp Duty?
A: No, if this is the only house you own, you will not be subject to the surcharge.
Q: I currently own two properties – my main residence overseas, and one in the UK, which is rented out. I was planning to sell the former, and rent in the UK whilst searching for a new home. Will I be subject to the tax load?
A: Yes, if you are not planning to buy your new home immediately, you will face the extra 3% Stamp Duty when you do come to purchase. One way around this would be to move directly into a new main residence in the UK, rather than renting in the interim.
Still struggling to understand the policy and its impact?
For a detailed look at the specifics, read the government’s full consultation (www.gov.uk).
Please note, this article is for guidance only, and does not constitute financial advice.
Liquid Expat Mortgages offer trusted advice on property finance for anyone thinking of buying a main residential property or second home. For tailored support on the new stamp duty, and guidance on how it may be possible to minimise the impact of the levy, get in touch with us today and we can point you in the right direction.
To have a chat with one of our advisors, call 0161 871 1216 or email firstname.lastname@example.org