In the first of a two-part article, Peter Rayney examines some of the thornier issues with the 3% stamp duty land tax surcharge.
The 3% stamp duty land tax (SDLT) surcharge rules are highly prescriptive and complex. They therefore contain a number of potential traps for prospective buyers of residential property (dwellings). Remember, SDLT only applies in England and Northern Ireland. Scotland and Wales have equivalent property transaction taxes, which have similar rules.
Here we consider some of the main concerns that buyers may have in relation to the 3% surcharge – strictly referred to as a ‘higher rates transaction (FA 2003, Sch 4ZA).
1. The 3% SDLT surcharge applies where an additional residential property is purchased – i.e. I already own one dwelling – is that correct?
Subject to special rules relating to the ‘replacement’ of a main residence (see 2. and 3. below), this is broadly correct. The legislation states that, when the buyer acquires the new dwelling, they must already own a major interest in another dwelling (with a market value of £40,000). If the buyer already has an interest in commercial property, that does not count.
The existing dwelling (or a ‘share’ in an existing dwelling) can be anywhere in the world – this would include, for example, a holiday home in Portugal.
The chargeable consideration paid for the new dwelling must exceed £40,000! The surcharge even applies to the acquisition of an interest in a new dwelling.
2. What happens if my proposed property purchase is replacing my main residence – I thought that was exempt?
The 3% SDLT surcharge does not apply where the buyer is buying the dwelling as a replacement for their existing main residence (Condition D at FA 2003, Sch 4ZA, para 3(5)). For these purposes, it would be irrelevant whether the buyer already has another dwelling, such as a ‘buy-to-let’ property. However, special rules apply where the buyer is unable to sell their existing main residence.
The question of whether a property constitutes a main residence is a question of fact – there is no prescribed period during which the property must have been occupied. There clearly has to be a degree of permanent occupation, which would be evidenced by a number of factors, including where the buyer/buyer’s family spend their time, where the buyer is registered to vote, address used for correspondence, and so on).
Importantly, the legislation requires a ‘replacement’ of a main residence. This means that, for example, where the buyer already owns another residential property or properties, any ‘first time’ purchase of a main residence would be subject to the 3% surcharge.
On the other hand, there will be cases where the main residence was sold some time ago, which may have been followed (for example) by a temporary renting of property (perhaps for employment reasons, etc.). Assuming the buyer has interests in other residential properties, the ‘replacement of main residence’ exemption can often still apply in such cases so that the subsequent purchase of a main ‘home’ would not be subject to the 3% surcharge.
The relevant conditions for the ‘replacement exemption’ in these situations depends on whether the new purchase was made by or after 26 November 2018. Broadly speaking, for post-26 November 2018 ‘new’ purchases, there is a qualifying replacement of a main residence where the buyer (or their spouse/civil partner) previously sold their main residence within the three years before that purchase.
This ‘three-year’ rule does not apply for pre-27 November 2018 ‘new’ purchases. In these cases, as long as a main residence was sold some time ago and a new one was purchased later, the buyer should qualify for the ‘replacement exemption’.
Practical Tip:
Examine all the facts surrounding a proposed residential property purchase carefully, as there have been many cases where the 3% SDLT surcharge has been paid unnecessarily.
