What is Stamp Duty and when is it charged?
Stamp duty is a tax payable on transactions involving land. This is the common name for what is now Stamp Duty Land Tax (SDLT) in England and Land Transaction Tax in Wales. The two taxes are broadly similar although rates differ. This page will refer to the position in England only unless otherwise stated.
It is termed ‘stamp duty’ as originally a stamp would be impressed on the deed to show the amount of tax that had been paid. Now the tax is payable on the ‘transaction’, and is charged to the whole of the money paid for the land or property concerned, whether this is evidenced in a deed or not.
This tax regime has become extremely complex with different regimes for England and Wales, different rates for residential and non-residential property, for individuals and companies, plus a surcharge or higher rate payable on the purchase of second or additional properties. There are various reliefs including First Time Buyer Relief, Multiple Dwellings Relief, and the ‘main residence exemption’ which applies to the surcharge. Special rules also apply to ‘linked’ transactions and where there are ‘connected’ parties, amongst others.
How much is Stamp Duty?
An online calculator has been produced to enable buyers to work out the tax which is payable:
How is the tax assessed and paid?
Any land “transaction” becomes liable to tax and the buyer must notify the transaction. In England this is to the HMRC (in Wales the Welsh Revenue Authority).
Land Transaction Return: Whether or not tax is payable in respect of your transaction, you are required by law to submit a tax return known as a Land Transaction Return. Your conveyancer will complete the return, submit it and arrange the payment of the tax due on your behalf.
Payment of tax: The return and the tax have to be made within 14 days of the due date – which is usually the completion date and penalties are imposed for late submission.
HMRC investigations: HMRC has the power to investigate returns which include an enquiry within nine months or a ‘discovery assessment’ up to four years later.
Below are some basics on SDLT (England only). As this tax can be extremely complex and quite involved this is to give information and guidance on the key points only, and this may be incomplete or over simplified for this purpose. It should not in any way be relied on as a complete or definitive statement. You will in each case need to take advice on your circumstances.
The higher rate or surcharge
Companies: A purchase by a company will always be subject to the surcharge- whether it’s a first purchase or not. There are however reliefs which apply in limited circumstances.
Individuals: For individuals there are different rules.
Foreign investors and ‘non-doms’: Foreign investors and individuals not domiciled in England receive no different treatment.
How much is it?
The charge is 3% of the purchase price. This is payable on top of the normal duty payable.
When does it apply?
If when you buy you will end up owning more than one residential property (irrespective of the intended use), you may be liable to pay the surcharge.
You are treated as owning more than one property if you own any property or property interest:
- alone or with anyone else
- as a trustee
- as a beneficiary under a trust
- as a parent of a trust for a child,
- and this is in a residential property in the UK or anywhere in the world.
If you have any interest of any type in residential property then you should seek advice, as this can be involved.
Joint Buyers: Remember that if you are one of joint buyers, then if any one buyer owns more than one property then the surcharge may be payable, even if all buyers do not.
Main residence relief
The property that you own, and live in as your home in the conventional sense is usually your ‘main residence’.
You should not pay the surcharge if you move in the usual way – that is you sell your home and move to a new one bought on the same day. This is even if you own other properties- whether you have one or more than one- these are disregarded.
Example: You own 10 investment properties, and you move house – you move from your main home to a new main home. You should not pay the surcharge – provided you retain no interest in the sold home. This relief does not apply to any property which is sold, but only where the sale is of your ‘main residence’ or main home.
Example: You own 10 investment properties and sell one of them. You retain your main home and buy a further main home. The surcharge would apply to the purchase as you have not replaced your existing main residence.
Sell before you buy
If you can’t sell and buy on the same day, then provided you buy within three years of the sale you should not pay surcharge when you do purchase your replacement main home.
- The former main home that is sold must have been your only or main home at some time during the three year prior to the purchase. So if you bought it to be your home- but then rented it out, never lived in it and then sold it, the condition would not be met.
- You cannot have bought another property in the meantime intending it to be your main home. So, for example, if you sold in 2017 and bought a replacement main home. You now wish to buy another to live in and keep/rent your existing property. You can’t here claim relief on the purchase of the third property.
Buy before you sell
Where a new main home is purchased before the current one is sold, you will pay the surcharge, but a refund can be claimed where the sale is completed within 36 months. You will usually claim the refund yourself.
A home with an annexe
These were originally caught by the surcharge on the basis that two dwellings were being acquired. The surcharge now will not apply – unless it would have done anyway.
The concession applies if the annexe (or subsidiary dwelling) does not exceed one third of the whole cost of the dwelling, and is acquired in one transaction – that is from the same seller. There can also be more than one annexe or subsidiary dwelling, provide they each meet the one third value rule. Each must be capable of independent occupation.
Where there is an annexe – or more than one dwelling is bought at the same time -there may be a significant advantage to the buyer as a relief- Multiple Dwellings Relief may apply.
Married couples/Civil Partner
Married couples/ Civil Partners have special treatment and for this tax are treated as one. So anything owned by one is treated as being joint, regardless as to whose name is on the title.
Therefore a purchase by one would be chargeable if the other owned property already, unless the purchase is to replace the main home. So if, for example, a husband owns an investment property in his sole name and the wife now wishes to buy one in her name. This new purchase will be subject to the surcharge.
Married couples/civil partners are treated as divorced for these purposes if they are either legally separated (by court order (i.e. decree nisi) or deed of separation) or where they are ‘living separately in circumstances that are likely to become permanent’.
Low price – a purchase at under £40,000 is not subject to the surcharge.
Inherited property – a small share namely 50% or less, in a property inherited within three years prior to the transaction can be disregarded.
Divorce/Separation/Dissolution – certain transactions made in connection with divorce and separation etc. are exempt from all SDLT, including the surcharge where it would otherwise have applied.
Property Adjustment Orders in divorce/dissolution – if a party owns an interest in a former family home which was retained pursuant to a Court Order, then this can also be disregarded for the purposes of surcharge when a new home is purchased by that party.
Transfers between married couples of civil partners only: Transactions involving only parties who are married/civil partners (and are living together for the purposes of income tax) are never subject to the surcharge (but may be liable to normal rates). This applies to all dwellings not just the main home.
Transfers of equity/lease extension – dealings in your own home: Where you own at least 25% of your home and have lived there throughout the previous three years, you will not be surcharged if you buy a further share. This includes lease extensions for your home, where the lease has at least 21 years left to run.
First Time Buyer Relief
This is available in England only, but the point before tax is payable is higher in Wales than in England.
‘First Time Buyers’ benefit from a concession in respect of SDLT, to reduce their upfront costs.
The term First Time Buyer however is misleading, as someone who has owned property but not purchased it – such as by gift or inheritance – is not classed as First Time Buyer. This is regardless of the extent of the ownership, and as to whether it has since been disposed of.
The conditions for this relief are:
- The purchase of a wholly residential property at a price of not more than £500,000
- The intention of the buyer to occupy the property as their only or main residence and,
- That the buyer has or has not, whether alone or with others, previously acquired a freehold or leasehold interest in residential property in the UK (except a lease with less than 21 years to run) or an equivalent interest anywhere in the world.
The conditions must be met by ALL buyers, otherwise the relief cannot be claimed. So for joint buyers, relief cannot be claimed if one has owned before, or if they are not all to occupy. If the conditions are met then no SDLT is payable on a purchase price of £300,000 or less. If the purchase price is over £300,000 then tax at 5% is payable on the part of the purchase price paid in excess of £300,000. If the purchase price is over £500,000 then normal rates apply to the whole of the purchase price.
Questions and answers
Q1. What is a first time buyer?
A person who has not acquired a freehold or leasehold interest in residential property in the UK (except a lease with less than 21 years to run) or an equivalent interest anywhere in the world.
Q2. I want to buy a house with my partner but one of us has previously owned a residential property. Can we claim the relief?
No. All of the buyers, when there are more than one, must be a first time buyer.
Q3. I previously bought a house jointly with my spouse/partner. The partnership has broken up so can I be treated as a first time buyer?
No. Where the individual has previously acquired an interest in a residential property as a joint tenant or a tenant in common the individual is not a first time buyer.
Q4. Is the relief available on transfers of interests in a home between partners?
Such a transfer normally requires a transfer from the existing owner to him/herself and the partner. Even if the partner is a First-time buyer the existing owner is not. So the relief is not available.
Q5. Can I get relief if I have previously owned an inherited property?
No. In this case a person will previously have acquired a major interest in a residential property.
Q6. Can I claim the relief if I’m buying on behalf of my parents?
No. Relief is not available unless the first time buyer(s) are buying, for themselves, a property that they intend to use as their only or main residence.
Q7. Is there an age limit on claiming the relief?
No. First time buyers can be of any age.
Q8. Is there a price limit on claiming the relief?
Yes, the sum for the whole of the purchase must not exceed £500,000.
Multiple Dwellings Relief
Multiple dwellings relief (MDR) is a relief which applies when more than one (separate) dwelling is bought at the same time, as part of the same transaction.
Complication: A small complication in this is that if you buy six or more residential dwellings at the same time then these are charged at non residential rates. It is possible however to elect to pay residential rates and apply MDR depending on which is most beneficial.
Condition: If MDR is claimed then if within three years an event occurs which would have meant that it could not have been claimed at the point of claim, then it is withdrawn. So would have to be repaid. So, for example, two flats are bought and then within three years are made into one, or block of flats bought is converted into offices.
Calculation: Divide the price payable by the number of units being bought to come up with the average price – work out the tax on that amount and times it by the number of units. The minimum rate is 1% of the price.
Surcharge: this is still payable unless the ‘annexe relief’ rules apply.
Example: Purchase of three dwellings from the same seller as one transaction at £900,000 – the usual tax (including the surcharge) would be £62,000. Applying MDR however would reduce this to £42,000
Example: ‘Annexe Relief’ applies
There can be more than one annexe (or subsidiary dwelling) – the rules were relaxed so that the surcharge does not apply.
Purchase of a dwelling including 2 annexes or subsidiary dwellings for £900,000- taxed as one unit = £35,000. Applying MDR would reduce this to £15,000.
As can be seen this is a complicated tax and complicated relief. The above gives an indication of the rules only.
Transfers of Equity (or property share)
This is where most commonly property is owned by unmarried joint owners and one is to buy out the other.
How the SDLT is dealt with can be difficult to understand. This is as there is usually a mortgage involved and the mortgage debt has to be taken into account.
If you and your partner own a house and have a joint mortgage, and hold the property so you have equal shares in it – you are entitled to 50% of any proceeds if it is sold, but are liable for 50% of the mortgage debt as well.
If you decide not to sell your house but you wish to leave and your partner wishes to stay, you would usually expect to be bought out and also to have no continuing liability for the mortgage. The lender would either agree to transfer the mortgage account to your partner or your partner would remortgage and take out a new mortgage paying off the old one. You may though decide between you that a cash amount should be paid to you for your ‘equity’ in the property – being the amount you would have received had the property been sold and the money left over divided between you.
In these circumstances the amount you are taken as having received is the cash amount for your share in the equity plus the amount of the debt you have been released from. This is then the ‘price’ paid by your partner and is subject to SDLT which your partner will have to pay.
A&B own a property and it is to be transferred to A. It’s a house worth £400,000 and has an outstanding mortgage of £100,000. A pays £150,000 cash for the 50% share of the equity. A also then takes responsibility for B’s 50% share in the mortgage = £50,000.
SDLT = £150,000 + £50,000 = £200,000 Tax £1,500
Surcharge: the higher rate of SDLT or surcharge may be payable on top of any SDLT ordinarily payable. So if A above also owns another property such as a buy to let. The surcharge is not payable however if the transfer is of A’s main home and has been lived in by A for at least the last 3 years.
Exemptions: exist where the transaction is made in connection with the ending of marriage or civil partnership, but not where the transaction involves other than the spouses or civil partners.