From April 2016, 3% stamp duty land tax surcharge can apply to the purchase of new additional residential property if the purchaser already owns one or more residential properties.
The charge applies to the acquisition of a dwelling. Essentially a building or part of a building counts as a dwelling for the purposes of the surcharge if at the effective date:
- It is used or is suitable for use as a single dwelling or
- It is in the process of being constructed or adapted for such use
Thus the purchase of say land for the construction of a dwelling is not caught nor is the purchase of say an existing commercial building purchased with the intention of conversion into a dwelling, provided it is not suitable for use as a dwelling at the effective date and the adaption work has not begun.
The main exception to the surcharge rule is the replacement of a property that is the purchaser’s only or main residence, if he has disposed or does dispose of a previous main residence within a set period, the surcharge does not apply.
Also of note is where the purchaser is married, their spouse is automatically also treated as a purchaser for the purposes of the 3% stamp duty land tax surcharge. If either spouse triggers the surcharge it will apply to the whole transaction.
The above rules can in some cases lead to some unforeseen consequences so advice should always be taken.
John sells the house which is his main residence and within the statutory three year time limit buys a replacement house to be his new main residence. He also owns a portfolio of residential rental properties.
In this scenario he is entitled to replacement relief and the surcharge will not apply.
Expanding the example above, John now sells the house which was his main residence and retains his residential property portfolio. He and his new partner Derek, within the set time limit, jointly buy a house to be their main residence. Derek has been living with his parents but owns a flat he rents out. In this scenario John and Derek must pay the 3% surcharge, although John qualifies for the exception, Derek does not because of the flat and he is not replacing a main residence of his.
There is some planning involved here in that they could have avoided the surcharge if Derek had sold his flat before completion of the new house. Alternatively John could have sold or gifted a share in his old house to Derek and he moved in (this need only be a fractional share and care will be needed with regard to capital gains tax) before he sold it such that it also became Derek’s main residence.
Mark and Fiona are married and jointly own a holiday home. Mark in his sole name owns their own main residence. They jointly buy a replacement property as their home and Mark sells their current main residence within the time limit. In this scenario they do not have to pay the surcharge because they are married.
Contrast this with if they had not been married they would have had to pay the surcharge because Fiona in this scenario did not sell a major interest in the old dwelling, although she lived there.
Tim and his wife Olivia have never owned a main residence but Tim owns three houses which he rents out. Olivia decides to purchase a house costing £1 million in her own name for them both to live in. In this scenario the joint purchaser rule must be applied and Tim is seen as a joint purchaser of the property to determine that the surcharge applies in this scenario.
Please note, Tim is not responsible for the tax nor is he the purchaser for any other purpose.
Jack and his wife Gill have bought three self contained properties in a Victorian mansion house as a replacement of their main residence. They are intending to combine these dwellings into one family residential property.
Unfortunately in this scenario the surcharge will again apply as HMRC has already successfully argued there would be no replacement of a main residence in such a case. There has been a recent tax case in 2020 reiterating this interpretation. The case in question is ‘Moaref and another ‘v’ HMRC 2020’.