Stamp duty and the additional property surcharge

Stamp duty can be a costly part of buying a house and, since April 2016, property investors, accidental landlords and holiday home buyers have had extra stamp duty to pay. Find out more…

Key points

  • For residential property, the stamp duty threshold is £125,000; if you buy a property above this price you'll pay the tax, which rises incrementallly with the property price
  • Buyers of second properties have to pay an extra 3% stamp duty on the entire purchase price for all purchases over £40,000
  • In some cases, the extra 3% will be refundable when the second property replaces the main residence and the first one is sold within 36 months
  • Even if this applies to you, you'll still have to come up with the extra 3% at the point of purchase, which can run to thousands of pounds and be a great challenge for homebuyers

When you buy a home in England or Wales, you might be preoccupied with how to pay off the mortgage and other fees, but there's one other major cost that you'll probably have to address: stamp duty land tax.

In December 2014, the way stamp duty was calculated changed significantly.

This meant that it no longer operated as a slab tax where the stamp duty rate would be applied to the entire property; consequently, the tax on a £130,000 property dropped overnight from £1,300 to £100.

Now, stamp duty applies incrementally in a similar fashion to income tax.

However, on 1 April, 2016, there was another major change to stamp duty, meaning that buyers of a second property now have to pay a 3% surcharge on the standard stamp duty rate - and they pay it as a slab tax, on the entire property price.

Stamp duty rates

For residential property, the stamp duty threshold is £125,000 - buy a home worth less than this and you won't pay any stamp duty (as long as it's your only property).

For properties above this threshold, you can use the government's stamp duty calculator to work out how much you'll owe.

Stamp duty in Scotland

Stamp duty isn't payable in Scotland - instead, you pay Land and Buildings Transaction Tax (LBTT). You can use the Scottish Government's calculator to work out LBTT if you live north of the border.

Paying stamp duty

Stamp duty is payable within 30 days of completing the purchase of a property, but you need to start working out how to pay it before you buy, as the cost can be significant.

You'll need to submit a stamp duty land tax return after completion, but many people agree a price with their conveyancer to do this on their behalf to avoid mistakes.

If it's not paid in time, you'll be charged a £100 penalty plus interest.

Note that even if the property falls below the £125,000 threshold you still need to file a stamp duty return to avoid the penalty.

Stamp duty and shared ownership

If you buy a shared ownership property, you have a choice over how you pay stamp duty.

You can pay stamp duty based on the total market value of the property within 30 days of buying it, just as you would with a standard transaction.

Alternatively, you can pay stamp duty in stages. If you choose this option, you pay stamp duty (if any is due) on the initial share you purchase, but then you don't pay any more stamp duty until you own more than an 80% share.

Bear in mind that, while the first option will probably mean a larger cost at the outset, you're likely to save money on stamp duty if property prices increase before you buy more of the property ('staircase').

Stamp duty surcharge on second properties

The 3% surcharge was designed to target buy-to-let investors and purchasers of second homes, but it's not that simple and other types of purchaser are also affected

In April, 2016, the government introduced a higher rate of stamp duty on second property purchases in an attempt to cool the buy-to-let market.

The higher rate is 3% above the stamp duty rate and applies to the entire property price.

This means it's a 3% slab tax, based on the whole property price and payable on top of the standard stamp duty applicable.

Properties purchased for less than £40,000 are exempt from the surcharge.

Who's affected by the stamp duty surcharge?

The 3% surcharge was designed to target buy-to-let investors and purchasers of second homes, the intention being to free up more property for people struggling to purchase a single home.

However, it's not that simple and other types of purchaser are also affected.

Property developers

Property developers who already own their own property will have to pay the higher rate of stamp duty, even if they don't intend to let the second property out. Try our mortgage calculator

This means there'll be a significant extra cost for developers who buy properties to renovate before selling them on.

People moving in together

If you're buying a property with someone who already owns their home and they're not selling it, then the additional stamp duty will be due on the property being bought.

This might feel very unfair for the partner who doesn't already own their home.

Note that if the retained former home is sold within 36 months, the 3% surcharge can be reclaimed, but you'll still have to find a way to pay it in the first place.

Homeowners divorcing or separating

If your marriage or civil partnership has broken down and you owned a home together, you'll have to pay the surcharge if you move out and buy a second home, unless you obtain a deed of separation or divorce first.

Even if you're unmarried and want to leave a jointly owned home to buy elsewhere on your own, you'll have to sell or transfer your share of the jointly owned property before buying your next home to escape the surcharge.

The surcharge has an impact on parents that want to help their offspring buy a property by purchasing it jointly with them

If you buy before selling or transferring your share of the former property, you'll have to pay the surcharge, but you can get it refunded if you sell or transfer your share within 36 months.

Parents helping children to buy

The surcharge has an impact on parents that want to help their offspring buy a property by purchasing it jointly with them.

If the parent has their own home already, the property bought with the child will count as a second property and the surcharge will apply, even if the parent isn't living at the home with the child.

Parents might want to explore different ways to help their children on to the property ladder, such as guarantor mortgages or gifted deposits.

Homeowners struggling to sell

If you're struggling to sell your current property and - for whatever reason - end up buying your next home before selling your current one, you'll have to pay the additional stamp duty.

This might be the case if you become an 'accidental landlord', pushed into renting out your previous property because you can't sell it, and buying another home for yourself.

It might also apply if there's a problem with your chain, forcing you to complete on your new home before the former one is sold.

If you subsequently sell it within 36 months, you'll be able to reclaim a refund on the 3% surcharge.

Owners of property overseas

If you own another property overseas you'll have to pay the surcharge if you buy another property in the UK.

This might be the case for ex-pats returning to the UK but wanting to keep a home they lived in abroad to use as a holiday home.

Reclaiming the 3% stamp duty surcharge

As mentioned, with some of the scenarios above you may be able to reclaim the 3% surcharge if the second home you're buying replaces your main residence and you sell the first home within 36 months of the second purchase completing.

Although this could mean a refund of thousands of pounds for many who have to 'overlap' properties during the buying and selling process, finding the money to pay the stamp duty bill in the first place still presents a problem.

A bridging loan could be a solution for some, but these can be costly.

Otherwise, buyers might need to rethink how they'll time their property purchase to avoid the surcharge if they cannot find a way to pay for it.

By Derri Dunn