Penalty stamp duty rate – the main residence exception

"In general purchasers buying their first property or replacing a main residence (even if the purchaser owns more than one property)… will not be subject to the higher rates" . (Government summary of consultation responses)

This post follows on from my previous article providing a summary of the main tax. Here we look at the above exception to the charge in more detail.

The majority of homeowners possess only one home or property and are unaffected by the new surcharge. An individual buying a second residential property can pretty much expect to pay the new stamp duty penalty or surcharge on that purchase. An exception is where the purchase is to replace a main residence. For this to apply there must be a sale of the existing main residence and the purchase of a replacement for it. Therefore the surcharge should not affect the majority of people moving in the conventional way, namely selling a home and buying a new home and moving on the same day. This applies no matter how many properties they may own in addition to their main home.

Ms A owns both a main residence and a second home. She sells her main residence and purchases a new one. Although she has two properties at the end of the day of the transaction, she has replaced her main residence so the higher rates will not apply.

Replacement of main residence

The exception is only where the main residence is replaced. Therefore the purchase of a main residence in any other circumstances would still attract the surcharge. So if a buyer owns an investment property and then buys a property to live in, the new purchase will attract the surcharge. In addition if a buyer owns more than one property and sells one and buys a property to live in, the purchase will attract the surcharge if the sold property was not the buyers main residence.

H owns a main residence. He is purchasing a new main residence, but rather than selling his previous main residence he will rent it out. At the end of the day of the transaction H owns two properties and is not replacing a main residence (as he is not selling his previous main residence), so the higher rates will apply.

N purchases her first property, which she will use as a buy-to-let. At the end of the day of the transaction she owns one property, so she will not pay the higher rates of SDLT, even though she is not using it as her main residence. Two years later, N purchases a residential property which she will use as her main residence, but she decides to keep her buy-to-let property. In this instance, as she has two properties at the end of the day of the transaction and has not replaced a main residence (as she has not sold a previous main residence), the higher rates will apply.

O is a buy-to-let investor with 10 residential properties in his portfolio. He also owns one residential property which he uses as his main residence. He decides to sell his previous main residence and purchase a new main residence.

At the end of the day of the transaction, he owns 11 properties - his new main residence and his 10 buy-to-let properties. However, as he has replaced his main residence he will not pay the higher rates of SDLT.

So what counts as a 'main residence'?

You cannot as with other taxes, select a property from your ownership and elect for this to be your main residence. If the individual only lives at one residence then that will be his main residence. If he lives at more than one residence then all the facts and circumstances have to be looked at, though it is accepted this is not necessarily simply where they spend the majority of their time, but is an objective test based on the facts. The guidance sets out the following as an non exhaustive but useful list of points to consider:

• If the individual is married or in a civil partnership, where does the family spend its time?
• If the individual has children, where do they go to school?
• At which residence is the individual registered to vote?
• Where is the individual's place of work?How is each residence furnished?
• Which address is used for correspondence?Where is the individual registered with a doctor / dentist?
• At which address is the individual's car registered and insured?
• Which address is the main residence for council tax?

The old main residence will count as such if it is the individuals main residence at the point of sale, or at some time during the period of 3 years before the purchase (subject as below).

On sale it is a matter of fact as to whether it is the main residence. On the purchase the buyer must intend to occupy this as his main residence. The fact that works are required first which prevent immediate occupation would not prevent the intention test being met.

Sale of the main residence- before purchase

The sale does not have to be at that same time as the purchase.

G sold a property which was his main residence 3 months ago. He still owns another property which he lets out. Since the sale of his main residence he has lived in rented accommodation. G then purchases a new residential property which he intends to use as a main residence. At the end of the day of the transaction, he has two properties, but as he is replacing his main residence the higher rates will not apply.

Purchase prior to 26.11.2018

On a purchase made before 26.11.2018 the sale can have occurred at any time in the past regardless as to how long ago this was, and it only has to have been the buyer's home at some time in that period of time.

Purchase from 26.11.2018

The sale will have to have been within 3 years for the purchase to count as a replacement and it must have been the buyer's home at some point during that period.

An individual buys a dwelling and intends it to be her main residence. The effective date of the transaction is 31 May 2019. If she had previously sold a dwelling at any time on or since 1 June 2016 then the purchase may be a replacement of a main residence. The dwelling she disposed of would have had to have been her only or main residence at some time during the period 1 June 2016 to 31 May 2019. She must not have acquired another new main residence after the disposal and before the purchase.

If the individual had purchased her new dwelling on 31 May 2018 then the three year time limits would not apply. The dwelling previously disposed of by her must have been her only or main residence at some time. She still must not have acquired another new main residence after the disposal and before the purchase.

The disposed of main residence must be the last one held. The buyer cannot have between the sale and the current purchase bought another main residence with the intention of this being the buyer's home.

Purchase of the main residence -before sale

Where a new property is purchased and intended as the new main residence but the present main home has not been sold, the buyer will have two properties and therefore on the completion of the new purchase will have to pay the surcharge. If the buyer then disposes of the former main residence within 3 years, the surcharge can be reclaimed.

Married couples

Couples who are married or civil partners are treated as one person for the purposes of the surcharge. That is anything owned by one of them is treated as being jointly owned. Therefore a purchase in one of their names only or a sale in one of their names only is relevant. Different situations may mean that married couples may have to pay a surcharge when an unmarried couple would not, and vice versa.

Mr and Mrs M are married. Mr M owns a home (which he purchased on his own before he was married) where the couple live as their main residence. Mrs M then buys a property to be rented out. At the end of the day of the transaction they own more than one residential property and are not replacing their main residence, so the higher rates will apply.

Had Mr & Mrs M been unmarried then the surcharge would not be payable on Mrs M's purchase.

Mr A marries Mr B. They each own a property (which they purchased individually before they were married and used as their respective main homes). Mr B then sells his former main home and purchases a new property to rent out. At the end of the day of the transaction Mr A and Mr B own more than one residential property and are not replacing their main residence, so the higher rates will apply.

Again had they been single the surcharge would not be payable. Had Mr A sold his former main residence, Mr B rented out his former residence, and Mr B bought a new main residence (for them both) then they would not have paid the surcharge on the new purchase. Even though the sale and the purchase are in different names, as they involve the replacement of a main residence then they can use the exemption. Had they been unmarried however Mr B would have paid the surcharge as he would have 2 properties and not replaced his main residence.

This article is not intended to be definitive or to act as a substitute for legal advice or specialist tax advice.

Examples given are for the Government Guidance or Consultation