Stamp Duty Land Tax (SDLT) has existed for a long time, but the 3% surcharge was only introduced in the past decade.
If you are buying or selling a house soon, or growing your property portfolio, understanding the intricacies the 3% surcharge helps.
It can potentially save significant amounts of money.
Read on to find out more.
What is Stamp Duty?
Stamp duty is a tax on any property or land you purchase in England and Northern Ireland over a specific value.
(In Wales, it is called ‘Land Transaction Tax’ and in Scotland, it is called ‘Land and Buildings Transaction Tax’. The tax rates can vary slightly in these countries, so you should seek out the latest government legislation for the exact numbers.)
The amount you need to pay is different if:
- You are a first-time buyer
- You already own one property
- You are completing a transaction on another property
- You are not a UK resident.
If this is not your first property purchase, you must pay stamp duty on purchases above £250,000.
The current thresholds for Stamp Duty are:
- £250,000 for residential properties
- £425,000 for first-time buyers buying a residential property worth £625,000 or less
- £150,000 for non-residential land and properties
For any residential property between £250,001 to £925,000, you pay tax at a rate of 5%.
Then, between £925,001 and £1.5 million, the rate goes up to 10%. And for anything above this figure, it increases to 12%.
First-time buyer rates
For first-time buyers, the rates are different.
Properties costing £625,000 or less don’t have to pay stamp duty on the portion up to £425,000.
The rate is then 5% on the portion from £425,001 to £625,000.
What is the 3% Stamp Duty surcharge?
Put simply, the 3% Stamp Duty Surcharge means that you pay an increased tax rate on second homes than you would if you owned just one property.
If the property in question is your second, third, fourth (and so on…) property, you will pay an extra 3% tax on top of the typical stamp duty rates.
For example, if you usually have to pay 5% tax, this would go up to 8%. If it is usually 10%, then the figure goes up to 13% – and so on.
The 3% Stamp Duty Surcharge, when calculated as a percentage of your sale price, can significantly increase your costs.
This additional surcharge often dissuades many from investing in a second home, especially when profit margins are tight.
Why does the 3% Stamp Duty surcharge exist?
When the Stamp Duty Surcharge was first introduced, it was proposed to make things easier for first-time buyers.
They do not need to worry about this additional tax (as they do not own a second property).
But the wealthiest do not accrue as much profit due to the 3% cut on their final selling price.
The surcharge also raises more money for HM Treasury.
Can I avoid paying the 3% Stamp Duty surcharge?
You can avoid 3% surcharge in certain circumstances.
The UK government provided most of these scenarios as guidance for what would or wouldn’t apply.
Replacing your main residence
If the property you are purchasing is replacing your main residence, you will not have to pay the 3% surcharge. This applies even if you own an extra property at the same time.
Transferring ownership
If you are transferring ownership (or part ownership) of a residential property to your spouse, the higher rates do not apply. This is providing that no one else is involved in the transfer.
Moveable property
The 3% higher rate of SDLT does not apply to “moveable” property, such as a caravan, houseboat, or mobile home, or property with seven years or less left on the lease.
Inherited property
You also do not usually have to pay Stamp Duty on your inherited house.
However, inheritance tax will usually apply in this scenario.
There are several other examples when the 3% Surcharge would not need to be paid.
If you are in doubt or need assistance completing paperwork, qualified experts can provide guidance.
Their support can give you the confidence to navigate the complexities of Stamp Duty and the 3% Surcharge.
What is a Stamp Duty surcharge refund?
Refunds on the Stamp Duty 3% surcharge are possible when people have been wrongly charged.
Perhaps the rules surrounding eligibility have changed. Or you were not aware that you could avoid it so paid when you shouldn’t have.
If you’ve been wrongly charged the 3% Stamp Duty Surcharge, you can claim a refund.
This process can be handled by a solicitor or done independently. Typically, it involves making a claim online or submitting it by post.
Once you send all the necessary information to HMRC, the claim is generally expected to be processed within 15 days.
If nothing happens within this timeframe, you should follow up. You can also research whether you are entitled to interest due on the refund.
The nature of property chains and timing house sales means it’s always possible to sell your main home before you purchase a second one.
So, if you sell your previous primary residence within three years (36 months) of purchasing the new one, you may be eligible for a refund of the additional stamp duty you paid.
Is it worth selling my main home before buying my second one?
You should seek expert financial advice on the answer to this question, specific to your situation.
Some people choose to sell their house fast so that they only own one property and are therefore not charged a higher tax rate. On the other hand, this is not always the wisest financial decision.
Do non-UK residents pay more Stamp Duty?
You usually pay more stamp duty if you are not a UK resident.
At the time of writing, this is 2% higher than the typical rate for a UK resident.
In this context, you are usually legally considered a UK resident if you lived in the UK for at least six months of the 12 months before you purchased the property.
How quickly does Stamp Duty need to be paid?
You usually have 14 days to file your stamp duty tax return and pay the amount owed.
If you submit your payment late, you may be fined.
