How to Avoid Stamp Duty on a Second Home

Purchasing a second home in the UK is an exciting venture, whether it’s for buy-to-let purposes, a holiday retreat, or simply an additional residence. However, along with the purchase comes the inevitable tax cost: Stamp Duty Land Tax (SDLT). While avoiding stamp duty on a second home is highly unlikely, there are several legal ways to reduce the amount owed. Understanding the latest SDLT rates, exemptions, and how these rules apply to second-home purchases in 2024 is essential for informed decision-making.

In this comprehensive guide, we will cover:

• What is Stamp Duty?
• Stamp Duty on Second Homes
• Ways to Reduce / Avoid Stamp Duty on a Second Home
• Refunds and Exemptions for Second Home Buyers
• Foreign Investors and Stamp Duty
• How to Pay Stamp Duty

What is Stamp Duty?

Stamp Duty Land Tax (SDLT) is a property transaction tax levied by the UK government when you purchase property or land in England or Northern Ireland. SDLT is charged on freehold and leasehold purchases, including those bought with a mortgage or outright. For second-home buyers, an additional surcharge of 3% was introduced in 2016 to curb excessive buy-to-let investments and second-home ownership.

The amount of stamp duty owed is based on the purchase price of the property and the applicable tax rates. Rates are set in tiers—higher-value properties attract higher taxes. With second-home purchases, the additional 3% surcharge applies to each tier, adding to the base SDLT rate.

Stamp Duty on Second Homes in 2024

In 2024, the government’s stamp duty thresholds introduced in 2022 remain in place until 31 March 2025. This change raised the nil-rate band for residential properties from £125,000 to £250,000. However, if you are purchasing a second home or a buy-to-let property, the additional 3% surcharge still applies on top of the normal rates.

Here’s how the SDLT rates for second homes are structured in 2024

Property Value SDLT Rate (2024) for Second Homes
Up to £250,000 / 3%
£250,001 to £925,000 / 8%
£925,001 to £1.5 million / 13%
Over £1.5 million / 15%

For example, if you’re purchasing a second home worth £350,000, you will pay 3% on the first £250,000, which is £7,500. For the remaining £100,000, the 8% rate applies, adding £8,000. In total, your SDLT liability for the second home would be £15,500.

This surcharge can substantially increase the overall cost of buying a second home, so understanding how SDLT works and exploring ways to reduce this burden is crucial.

Way to reduce/avoid stamp duty on a second home?

Although it’s unlikely you’ll avoid paying SDLT on a second home, there are a few legal strategies you can use to reduce the amount owed:

1. Buy a Property Under £40,000

SDLT does not apply to properties priced below £40,000. This threshold, however, is relatively low, and such properties are rare, especially in prime locations. Still, it’s worth considering if you’re purchasing a smaller property, such as a parking space, garage, or very small residence, which may qualify for this exemption.

2. Consider Moveable Properties

If you are purchasing a moveable home, such as a mobile home, houseboat, or caravan, you are not liable to pay SDLT. These types of properties are considered non-permanent and therefore fall outside the remit of SDLT regulations. Moveable homes can be an attractive alternative for holiday or retirement homes and are exempt from stamp duty charges.

3. Self-Build Homes

If you’re building your own home, SDLT is only payable on the cost of the land, not on the value of the finished property. This can significantly reduce the stamp duty bill, particularly if you’re building in a high-value area where property prices are steep. By buying a plot of land and developing it yourself, you can sidestep the higher SDLT rates on finished homes.

4. Negotiate the Purchase Price

Since SDLT rates are based on property price bands, negotiating the price can result in significant savings. If the purchase price is just above a higher SDLT band, negotiating to bring it down could move the property into a lower rate, reducing the SDLT liability.

5. Joint Ownership Strategies

If only one party in a couple already owns a home, purchasing a second property in the name of the non-homeowner could avoid the 3% surcharge. However, this is only possible for unmarried couples or friends purchasing together. Married couples and civil partners are considered joint owners of each other’s property, so this strategy does not apply.

6. Developer Incentives

In some cases, property developers may offer to cover the stamp duty as part of an incentive package for new build homes. While this is relatively rare, it’s worth asking developers if they can include SDLT in the purchase price, especially if buying off-plan.

Refunds and Exemptions for second home buyers

You may be eligible for a refund on the 3% SDLT surcharge in certain circumstances. If you purchase a second home but sell your primary residence within three years, you can claim back the additional 3% surcharge. This applies to people who needed to move quickly, such as relocating for work, but were unable to sell their first home at the time of the second purchase.

To claim the refund, you need to submit a request to HMRC, which can be done online. HMRC typically processes refunds within 15 working days. Ensure you have all relevant documents, such as the SDLT transaction reference and property details, to facilitate a smoother process.

Stamp Duty Excemptions for second homes

There are limited exemptions for paying SDLT on a second home, but here are some situations where the additional 3% may not apply:

1. Inherited Property

If you inherit less than 50% of a property, you are exempt from paying SDLT. This exemption acknowledges that inheriting property is different from actively buying it, as you don’t have a choice in the matter.

2. Replacing a Main Residence

If the second home you purchase is intended to replace your main residence, and you sell your original property within three years, you won’t have to pay the 3% surcharge. This exemption is designed for individuals who need to move but haven’t yet sold their primary home.

3. Leases with Fewer Than Seven Years Remaining

If you purchase a leasehold property with fewer than seven years remaining on the lease, the 3% surcharge does not apply. This is because short-term leases are treated differently under SDLT regulations.

Foreign Investors and Stamp Duty in 2024

For non-UK residents, a 2% surcharge on top of the SDLT and additional 3% for second homes applies. This means that foreign investors could face stamp duty rates as high as 17% on properties valued over £1.5 million. The surcharge is part of the government’s broader strategy to regulate overseas investment in the UK property market.

Foreign investors should seek professional tax advice to understand their full SDLT liabilities and explore possible exemptions or reliefs.

How do I Pay Stamp Duty on a Property?

When it comes to paying stamp duty on a property, the process typically involves submitting a stamp duty return to HM Revenue and Customs (HMRC) and ensuring the tax payment is made within a specified timeframe. In most cases, this task is handled by a solicitor or conveyancer who will assist you throughout the property purchase process.

Once the purchase is completed, your solicitor will prepare and submit the stamp duty return on your behalf. This return includes important details about the property transaction. Such as the purchase price, property address, and the individuals involved in the purchase. It is crucial to provide accurate and comprehensive information in the return to ensure compliance with tax regulations.

After submitting the stamp duty return, your solicitor will also arrange for the payment of stamp duty. The payment must be made to HMRC within 14 days of completing the property purchase. The exact amount to be paid depends on the purchase price of the property and the applicable stamp duty rates.

By entrusting this process to a solicitor or conveyancer, you can ensure that the necessary paperwork is properly handled and the stamp duty payment is made on time. Their expertise and experience in property transactions will help streamline the administrative tasks and ensure compliance with tax obligations.

Ways to Reduce Stamp Duty on a Second Home

There are several ways investors can reduce the amount of stamp duty on a second home.

If purchasing from a developer, sometimes as part of the package they will offer to pay the stamp duty for you, but this will depend on the developer, property and situation. Here are some other ways to avoid stamp duty on a second home.

Here are some other ways to avoid stamp duty on a second home.

• Receive the Property as a Gift

When a property is in someone’s will or you got it as a gift, you won’t have to pay stamp duty. However this only applies if the deeds are transferred to you without a mortgage. If you have to take responsibility for a mortgage  – either in full or in part – you may still have to pay stamp duty based on the market value of the property. For inherited property, if you already own a property and receive a second through inheritance, normally you do not have to pay stamp duty but may be liable for inheritance tax.

• Negotiate the Property Price

The amount of stamp duty you need to pay is based on the property price, with different rates depending on the band the property price falls into. If the amount is just above a higher band, it may be possible to negotiate on the property price in order to get into a lower stamp duty tax band and pay a lower amount of stamp duty tax.

• Self-Build

While not an option for everyone, if you decide to build your own home from scratch by purchasing land with permission to build a home, you can greatly reduce the amount of stamp duty tax you will pay. In this situation you will only need to pay stamp duty tax on the price of the land, rather than the value of the finished property.

• Get a Refund on Stamp Duty

In some circumstances, it’s possible to claim back the stamp duty you paid. For example, If you sell your main home within three years of buying your second property, you can claim back the additional 3% stamp duty surcharge that applied to the second home. This usually applies to people who struggled to sell their first residence or needed to relocate quickly.

To claim back stamp duty, you can apply online and you don’t always need a solicitor or accountant. Usually HMRC will process the refund within 15 working days from receiving all the information it requires. This unusually includes property details, the SDLT transaction reference, details of the property, and the amount you are asking for as repayment.

What about Joint Ownership on a Second Home?

When it comes to joint ownership of a second home, the rules regarding stamp duty can vary depending on the specific circumstances. In general, if one of the buyers already owns a property and the other buyer does not, there may be an opportunity to avoid paying the additional stamp duty surcharge.

To take advantage of this opportunity, the buyer without a property should be the sole name on the title deed. By ensuring that only the non-property owner is a legal owner of the second home, you can avoid the additional stamp duty surcharge.

However, it’s important to note that this exemption does not apply to married couples or those in civil partnerships. In such cases, both individuals are considered joint buyers regardless of property ownership. Therefore, married couples or civil partners would still be subject to the additional stamp duty surcharge, even if one of them does not own a property.

Conclusion

In many cases figuring out how to avoid stamp duty on a second home can be a tricky endeavour. However, there are ways to reduce the amount you will pay such as negotiating the property price or undertaking a self build. If you are thinking of buying a second home, get in touch with us for more advice about how to reduce or avoid paying stamp duty on a second home, or find out more about buying a property as an investor.