As many of our readers will be aware, the SDLT code includes provision for “higher rate” transactions which (broadly) involve the purchase of a second dwelling (where individuals are concerned). The normal tiered rates of SDLT are all increased by 3%, as outlined in the table below.
|Relevant Consideration||Normal||Higher Rate|
|So much as does not exceed £125,000||0%||3%|
|So much as exceeds £125,000 but does not exceed £250,000||2%||5%|
|So much as exceeds £250,000 but does not exceed £925,000||5%||8%|
|So much as exceeds £925,000 but does not exceed £1,500,000||10%||13%|
|The remainder (if any)||12%||15%|
It is not at all uncommon for our clients to personally own an existing dwelling when they buy a new home, and the additional SDLT is unwelcome to say the least.
By way of example, while a purchase of a £400,000 residence would suffer £10,750 SDLT under “normal” circumstances (ie without a second property in personal ownership), this more than doubles to £22,750 where the higher rate applies. If it is possible for the purchase to qualify for “replacement of only or main residence” treatment, that will inevitably be attractive to the purchaser.
For this reason Tax Tuesday seeks to summarise the key aspects of “replacement”, covering the vast majority of the enquiries we receive. This does not, however, endeavour to deal with all the rules which apply to “higher rate transactions” and advice should always be sought to ensure you are clear about the SDLT implications of your proposed acquisition.
These are the key issues to be aware of in relation to “replacement” of main residence:
- The new purchase must be intended to be the purchaser’s only or main residence. Intention may be obvious but it may need to be evidenced;
- There needs to be a disposal of a previous main residence for there to be a “replacement”. Retaining a previous main residence personally, for example for letting, will deny “replacement” treatment;
- The disposal of the previous main residence might take place before purchase of the new main residence (as long as that disposal is within three years before the date of the new purchase). In this case, the new purchase will be able to claim replacement treatment at the time of the new purchase and avoid payment of any higher rate liability;
- The disposal of the previous main residence might take place after the purchase of the new main residence (as long as that disposal is within three years after the date of the new purchase). In this case the new purchase will be subject to higher rate SDLT but will be subject to refund of the higher rate element of the charge, after the later disposal of the previous residence (see 6 below);
- Where there are two (or more) individuals making the purchase and they are not married, then the assessment of whether this is a “replacement” must be undertaken individually for each individual. Both (or all) of the individuals must qualify for the overall purchase to benefit from “replacement” treatment. There will be no partial relief from higher rate on the acquisition of a dwelling by more than one individual.
For an unmarried couple buying their first home together, where, for example, one is due to sell his previous flat but the other is due to retain her flat for letting (say), they might consider (i) having an interest in his flat (where they now live) transferred into her name prior to the new purchase; or (ii) having him, only, make the purchase (and sorting out joint ownership at a later date, maybe after they are married); or even (iii) getting married first!
- Where the disposal of the previous main residence takes place after the purchase of the new, a claim can be made to amend the SDLT return of the purchase (and obtain a refund of the higher rate element), typically within 12 months of the date of the disposal of the previous residence.
- It should be noted that companies pay the higher rate on their purchases of dwellings, irrespective of there being a “second” property involved.
While the law is arguably straight-forward in principle, our experience is such that it can prove tricky in practice and does warrant attention early on in the process of considering the purchase of a new home.
If you would like to explore your position now, or in future, in relation to your plans for a new residence, please get in touch with your relationship principal here or email our Tax Partner, Chris Barrington.