Duty Bound – Stamp Duty Land Tax Considerations for Residential Purchasers

Duty Bound – Stamp Duty Land Tax Considerations for Residential Purchasers

In 2014, the Coalition Government overhauled the existing ‘slab structure’ method of levying Stamp Duty Land Tax (SDLT), which required property buyers to pay a single rate of SDLT on the entire property price.

The progressive ‘tiered’ system (brought in by the 2015 Spending Review and Autumn Statement) was introduced to ensure that property buyers paid a more equitable percentage of taxation within certain bands.

In this respect, the tax payable is calculated on the part of the property purchase price that falls within each specified band. The main advantage of the new system is that in 98% of all residential property transactions, homeowners pay less SDLT.

When is SDLT levied?

SDLT is payable by a purchaser in any land transaction if it involves the acquisition of an interest in land. This includes buying a house or creating a Lease.

Stamp Duty is payable once the purchaser takes possessory control of the property on completion. If a purchaser takes possession before completion (often known as ‘resting on a contract’), this will also trigger the tax.

Additionally, if you purchase a share in another property, this will still be subject to the tax so long as the share is worth £40,000 or more.

An SDLT tax return will need to be completed (usually by your solicitor) and must be sent with the tax fee to the HMRC within 30 days of completing the purchase of your home. Failure to do so can result in penalties and accrued interest on the penalty being imposed.

Am I exempt?

There are circumstances in which the transfer of land may not trigger SDLT liability. The predominant ones being:

  • Any land transaction below £40,000
  • A gift of land
  • Transfers of land in a divorce
  • Transfers of land to a charity
  • A licence to occupy

Calculating your tax liability

Your Stamp Duty Land Tax liability can be calculated by using the table below:

Chargeable consideration               Normal Rate                   Surcharged Rate

Up to £40,000                                                    0%                                                          0% (potentially 3%)

£40,001 to £125,000                                         0%                                                          3%

£125,001 to £250,000                                      2%                                                          5%

£250,001 to £925,000                                      5%                                                          8%

£925,001 to £1,500,000                                   10%                                                        13%

Excess over £1,500,000                                  12%                                                        15%

For example, if you were purchasing a property for £300,000, the SDLT would be calculated as follows:

  • 0% on the first £125,000
  • 2% on the next £125,000 (£2,500)
  • 5% on the remainder of £50,000 (£2,500)

Total SDLT liability is calculated by adding the rates together, meaning you would pay £5,000.

What is the 3% Surcharge?

Not only did the 2015 Spending Review overhaul the old method of taxation, it imposed an additional surcharge of 3% on buyers of additional dwellings (i.e. second home owners and ‘buy-to-lets’).

The rationale behind this was to create a deterrent for ‘buy-to-let’ properties and to free up property stock for home-owner occupiers. For unlucky parties eligible for this tax, the surcharge is loaded onto the entire purchase price of the property and effectively works in the same manner and form as the previous ‘slab’ tax.

Taking the above example of the purchase for £300,000 into consideration, the SDLT with the added 3% surcharge would be calculated as follows:

  • 3% on the first £125,000 (£3,750)
  • 5% on the next £125,000 (£6,250)
  • 8% on the remainder of £50,000 (£4,000)

The total liability for this purchase would therefore come to a considerable £14,000.

Real-life scenarios – 3% surcharge in action       

All of these scenarios would incur the surcharge:

Working away from home: Paul owns a flat in London and a country cottage. Sent to work in Berlin for 5 years, he rents in Berlin and lets out his London flat. After 4 years, Paul sells his London flat, replacing it with a small house, where he intends to live when he returns from Berlin.

Purchase of a first home: Sarah is an Officer living in army accommodation. She bought a flat five years ago to get on the housing ladder. She is now leaving the army and buying her first home, keeping her flat.

The new home: Unmarried Anna and Bob live together in Anna’s house. Bob rents out the flat where he used to live. They are moving. Anna will sell her house and they will jointly buy a new home.

What if the new home is to be my main residence?

If the home you are buying replaces your main residence, you will not be liable for the 3% surcharge. However, in order to replace your main residence, the last one will need to be disposed of by sale or by gift. Failure to dispose of your previous main residence will mean that you will own 2 properties and the transaction will attract a surcharge.

If you already have 2 or more properties, and you sell your main residence, you won’t have to pay the 3% surcharge if you buy a new main residence within 3 years.

Are you entitled to a refund?

There are instances where you may be eligible for a refund for the extra (surcharged) amount paid, if:

  • You sell your previous main residence within three years
  • You claim the refund within three months of the sale of your previous main residence
  • You claim the refund within 12 months of the filing date of your self-assessment tax return

You should always discuss your personal circumstances with a legal expert before you can assess the Stamp Duty Land Tax that may be charged, as the rules and regulations are complex and cannot be covered in full within this article.

If you would like to speak to one of our Residential Property solicitors surrounding Stamp Duty Land Tax, or for any other issues related to Residential Property, please contact Shabina Hussain on 01494 788027 or email shh@blasermills.co.uk