How Stamp Duty Surcharge Changes are Going to Affect Those Investing in Property
For many years property has been seen as a sound investment, but the government, last year made a controversial move, which made things a little more awkward. As conveyancing solicitors in London, we are being asked quite a lot about it because the landscape has changed so significantly.
The 3% duty is a loading on existing Stamp Duty rates, which took effect from April 2016 and applies to anyone that is buying additional residential properties anywhere in the UK , including Scotland, which announced a similar 3% surcharge in its own Budget.
Even if the property is abroad, you are liable to pay the surcharge, so if you have a holiday apartment in France and are buying your first home in the UK, you’ll have to pay the additional tax.
However, if the second home you are buying is abroad, the purchase will fall under the buying laws of that country, so neither Stamp Duty nor a surcharge will be relevant.
Ever since the end of 2014, regular Stamp Duty has been charged in a tiered way like income tax, where you only pay the higher rate on the slice above any threshold. However, the 3% surcharge still works as a slab tax, which means it applies to the entire purchase price of the property.
As an example, if you are buying a second home that costs £400,000, the extra 3% Stamp Duty would equate to £12,000, or 3% of the entire price. If you add that onto the £5,000 regular Stamp Duty bill on a home of this value, you would end up paying £17,000 in total.
The surcharge is such that even if you are helping out your children, you are likely to be stung if you have a home of your own. You will be liable for the 3% surcharge if your name is on the property deeds – even if it’s joint with your child’s name. The best way to get around this is if you bought the home for your child outright and just their name was on the deeds, the 3% surcharge would not apply.
Also, if you are buying jointly with your partner who doesn’t already own a property, you will still pay. Again, you would have to treat it the same way as if you were buying with a child, so a large element of trust is involved. The 3% surcharge was going to apply to any annex purchased alongside a main residence, if it had a value of more than £40,000, could be bought by a third party and used as an independent dwelling.
However, the Government has made a U-turn on this and agreed that, so long as the annex is bought alongside the main residence, it will NOT be subject to the higher rates Stamp Duty. There may be occasions where you need to buy another main residence before selling the last one. So, as long as you sell the old home within 36 months of completing on the purchase of the new one, HMRC will make a full refund.
Of course, on the flipside, you may have to sell your main residence and move into an interim property before you can buy your next one in which case, you will have 36 months (after completing on the sale) where you can buy a new main residence without the surcharge.
Bear in mind though, the time cap is only in place for purchases made after 26 November 2018. To make it fair to people who had already sold their main residence before the Autumn Statement (when the higher rates were announced), for purchases made on or before 26 November 2018, this ’36-month test’ does NOT apply. No Stamp Duty is payable on properties that are inherited, so the 3% premium is not relevant. However, if you have inherited a property and go onto purchase a second home without selling it, you will be hit with the surcharge.
There is no way around it, even for professional landlords the Government has a keen eye on preventing tax avoidance, so forget trying to wrap it up in a limited company. The only exemptions are on second homes that cost under £40,000. It’s also worth bearing in mind that if you are charged Capital Gains Tax on any profit you make on the sale of an additional home, the 3% surcharge can be offset against your bill.
It is indeed a complex subject and being involved in transfer of equity and many other options, the best advice is to speak to us. Property remains a sound investment, but understanding the new landscape is paramount and we at Pindoria Solicitors are happy to help.