If you’re looking to buy a second home, you may want to find out more about the tax implications first. Since 1 April 2016, higher rates of stamp duty land tax (SDLT) were introduced on second homes, which includes buy-to-let properties and holiday homes.
The current rates of SDLT on a second home are as follows:
- £40,001 – £125,000: 3%
- £125,001 – £250,000: 5%
- £250,001 – £925,000: 8%
- £925,001 – £1.5 million: 13%
- Over £1.5 million: 15%
* Stamp duty does not apply if the second home is worth less than £40,000.
To work out how much you will need to pay you will have to apply the percentages in a tiered approach. For example, if you buy a second home which costs £200,000, the first £125,000 of it will be applicable to the 3% tax rate (£3,750 for SDLT). The remaining £75,000 will then be charged at a rate of 5% (a further £3,750 for SDLT). This makes the total tax to be paid £7,500.
Exceptions to SDLT on a second home:
- Plots of land. Purchasing a plot of land will be exempt from the above surcharges, even where you may have plans to build a house on the land in the future. However, you must ensure that both construction has not started at the time of purchase and that the contract includes for a house to be provided on the plot of land as a part of the sale.
- Inherited property. Where you inherit a second property, you will not be subject to stamp duty; however you may be liable to pay inheritance tax. You can find out more about this on our inheritance tax planning In instances where you inherit a property and then go onto buy a second property, you may be subject to pay the additional stamp duty if you do not dispose of (or sell) the inherited property first.
- Receiving property as a gift. Stamp duty only applies on ‘chargeable consideration’ which usually means the purchase price. Where a property has been gifted to you outright you will not have to pay stamp duty.
- Properties not considered ‘dwellings’. Types of property that do not attract stamp duty include offices, warehouses, boathouses, caravans, mobile homes or those properties valued at less than £40,000 as mentioned above.
- Replacing your main residence. If you already own more than one property and are buying a new one which will become your main residence, you will not have to pay the additional stamp duty rate – so long as it is replacing your original main residence. By replacing, this means your existing main residence must be disposed of by means of sale of gift.
How joint ownership affects SDLT on a second home:
- If you are buying a property with another person, but one of you already owns property, it is still possible to avoid paying the additional stamp duty rate so long as the person who does not own property is the sole name on the title deed.
- However, if you are a married couple or in a civil partnership, and one of you already owns property, you will be unable to avoid the additional stamp duty and you are both treated as joint buyers.
- If you are separating or getting a divorce and are buying a new house to live in, you may have to pay the additional charge if you retain a share in your existing home worth more than £40,000. To avoid this you may want to sell your share to your former partner, or you may both decide to sell the entire property.
- Similarly, if you are in the situation where you are separated from your spouse or civil partner, and this is likely to become permanent; where they purchase a second home and are liable to pay the additional stamp duty, you will not automatically be treated as a joint buyer as you would have been when you were a married couple or civil partners.
Reclaiming SDLT on your second home:
Getting your timings right when buying property can be difficult. If you are in the position where you will buy your second home before disposing of your main residence first then you will have to pay the SDLT surcharge. However, this can be claimed back from HMRC as a refund as long as you sell your original main residence within 36 months of completing the purchase on your second home.
Alternatively, you may be in the opposite position where you will have to sell your main residence first and are not yet ready to buy your second home. From 26 November 2018 new rules allow you to buy a second home without incurring the additional stamp duty so long as you do so within 36 months of completing the sale on your original main residence and that the new home becomes your main residence.
If you need help on stamp duty, or indeed, capital gains tax if you are selling a property, we can advise on the best possible course of action in order to keep your tax payments to a minimum. Find out how we can help on our Personal Tax Planning & Advice page.