3% extra stamp duty for buy to let investors

Wednesday, 10 February 2016

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Independent mortgage advice, Fife

Increased stamp duty for buy to let investors and second home buyers

Background

The government has now finished its consultation on how the new increased rates of stamp duty for buy to let investors and second home buyers will work. The measures come into effect on 1st April 2016 but the details of them are described in detail below. The details relate to the rules in England, Wales & NI only, but the rules in Scotland are going to be identical.

The policy sounds simple – anyone buying a property as a second home, or as a buy to let investment, will pay stamp duty at a rate 3% higher than “normal” residential homebuyers. However, in reality there are lots of situations where other people could also be caught by these rules.

For example, what if you buy a new house and intend to sell your old house, but just haven’t quite completed the sale by the day you purchase the new property? Also, what if you intend to keep your existing property and turn it into a buy to let property? And how about situations where someone purchases a buy to let property, but doesn’t own a residential property themselves (not that common, but this does happen)?

Proposed policy

It looks like the government is going to start off with a fairly simple test. If, at the end of the day on which you pay for your new property, you own more than one property, then you will have to pay the higher rate of stamp duty on the purchase price UNLESS you are replacing your main residence AND have already sold your existing main residence.

If you dont own more than one property at the end of the day of purchase then, even if you are buying a buy to let property, you will escape the higher stamp duty. If you own more than one property at the end of that day then you will pay the higher stamp duty, even if you intend to sell your old home later. However, if you sell your old home within 36 months then you will be able to reclaim the extra stamp duty that you paid.

The government gives the following examples to help understand this:

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.

Married couples and civil partners

The government will treat married couples and civil partners living together as one unit, which means such couples can’t escape this extra tax by owning the main house in one person’s name and buying the second house (or buy to let property) in the second person’s name. For example:

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.

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.

Married couples who are living seperately, and where this situation is likely to become permanent (i.e. divorcing couples) will be exempt - in other words, if the husband owns a property but the wife does not, and they separate and live in different properties with the intent to make this permanent, then the wife can buy a new property with no extra stamp duty.

Joint purchasers

Joint purchasers who are not married or in a civil partnership will also be caught under the new rules. So if you don't own a property, but are buying a house (residential or buy to let) with someone who does, and they aren't selling their existing property, then you will pay the extra 3% stamp duty too. This will catch a lot of people who aren't expecting to pay the additional tax.

Inherited property

To help people who inherit part of a property, and take a while to sell it, there is an exemption for anyone who has inherited a 50% or smaller stake in a property in the last three years.

Owners of property based outside England and Wales (or outside Scotland, for Scottish stamp duty)

It doesn't matter if the property you own is in England and Wales, or Scotland, Northern Ireland, or anywhere else in the world. If you own two residential properties anywhere at the end of the day of purchase, you pay the extra stamp duty.

For example:

S owns a property in Scotland, which she uses as a main residence. She is purchasing her first property in England, Wales or Northern Ireland, which she will use as a second home. At the end of the day of the transaction she owns two or more properties globally and is not replacing her main residence, so she will pay the higher rates of SDLT.

Buying a home for children

Couples who buy a property with their children (or for their children to live in) won’t escape the higher stamp duty, sadly, if the parents are the owners or part-owners at the end of the day of purchase and own a property themselves already.

Purchases of property by companies

Many landlords own buy to let properties via a limited company. Such companies will have to pay the higher stamp duty, even on the first purchase they make.

Furnished holiday lets

Purchases of holiday let properties will be treated the same as other residential property i.e. higher stamp duty may apply.

Properties bought by trusts

If the trust is a "bare" or "absolute" trust, or one with a "life interest", then the purchase will be assessed as if the beneficiary of the trust was buying the property. If the beneficiary already owns a property then extra stamp duty will apply. For all other trusts (such as discretionary trusts) the extra 3% stamp duty will apply.

Timing and transitional relief

The higher rates will only apply to purchases of additional residential property which complete on or after 1 April 2016. If contracts are exchanged after 25 November 2015 then the higher rates will apply if the purchase is completed on or after 1 April 2016. However, if contracts were exchanged on or before 25 November 2015 but not completed until on or after 1 April 2016, the higher rates will not apply.

The government estimates around 90% of residential property transactions in England, Wales and Northern Ireland will not pay the higher rates of SDLT. Transactions under £40,000 do not require a tax return to be filed with HMRC and are not subject to the higher rates.

Exemptions

The higher stamp duty rates will not apply to any commercial property (shops, agricultural land, mixed use property).

Treatment of large investors

It initially looked like that there would be an exemption for buyers (companies and possibly individuals too) who purchase 15 properties at once, or possibly for buyers who already have a portfolio of 15 properties. However, this exemption was cancelled in the 2016 Budget.

The government page relating to this consultation can be found here.

For our main buy-to-let advice page please click here.

Chartered Financial Planners. FCA Regulated (FCA no. 603653)