How to Avoid Stamp Duty on a Second Home
When purchasing a second home, stamp duty is a major consideration as it has a big impact on an investor’s overall budget. While most of the time paying stamp duty on a second home is unavailable, if you’re wondering how to avoid stamp duty on a second home there are ways to reduce the amount you pay and in certain circumstances stamp duty exemptions do apply.
Whether you want to buy a second home as a holiday home or as a buy-to-let property investment to bring in additional income, in this guide we take you through the basics of stamp duty, how it applies to second homes, ways to reduce the amount of stamp duty you pay and even how to avoid stamp duty on a second home in certain circumstances.
What is Stamp Duty?
The Stamp Duty Land Tax – also known as Stamp Duty – is the tax you need to pay when purchasing a house in the UK (the tax also applies to land purchases). The tax applies to both freehold and leasehold properties, whether you purchase through a shared ownership scheme or buy a property outright or with a mortgage.
How much stamp duty you need to pay will depend on the purchase price of the property and the tax band it falls into. Whether you pay stamp duty also depends on whether you are buying a first or second home, and whether you are a first-time buyer.
In July 2020, the UK government introduced a stamp duty holiday with the aim of boosting the property market as the country came out of the first pandemic-related lockdown. The tax cut made it easier for buyers and sellers during the pandemic, which had put a freeze on the market and impacted finances. From March until June 2021, there was no tax to pay on the first £500,000 of property purchases. A transitional period applies from July 2021 to the end of September 2021 when you won’t have to pay tax on the first £250,000 of a new property. The stamp duty tax returns to normal rates from October 2021.
As a result of the stamp duty holiday, house prices did see a rise during 2020 and 2021 as people attempted to complete a sale before the stamp end date. It is thought that in some areas, property prices may now begin to fall as there is less demand from people looking to buy homes before the stamp duty deadline in order to save on tax.
If you are a first-time buyer purchasing your first property, there is no stamp duty to pay on properties up to £300,000. However, if you purchase a home for more than £500,000, the normal stamp duty fee will apply (5%).
Does Stamp Duty Apply to Foreign Investors?
Overseas investors who are non-UK residents are subject to a 2% stamp duty surcharge when purchasing property in England. This rate is in addition to the existing rate of tax and based on the value of the property. However, if the overseas investor is a first-time buyer in the UK, they may quality for the first-time buyer tax rate for properties under £300,000. Find out more about being a foreign investors in UK property in this article.
Stamp Duty on Second Homes
For investors buying their second property – whether it’s a holiday home or buy-to-let property, there is an additional stamp duty surcharge of 3% on top of the normal tax bands. The 3% surcharge applies to any property over £40,000.
As well as paying stamp duty on a second home, other taxes may apply to second properties. You’ll have to pay council tax for the period you own the property. How much is dependent on where your property is located and often rates increase annually. Other applicable taxes will depend on your use of the property. For example, if you purchase a second home as a buy-to-let property you’ll need to pay income tax on any rental income and when you come to sell it, capital gains tax will apply.
How do I calculate Stamp Duty on a Second Home?
While stamp duty is shown as a percentage, you do not apply this to the entire cost of the property, but the portion relevant to the band. For example, if you invest in a second property that is £350,000 – You pay 3% on the first £250,000. The remaining £100,000 portion would have the 8% tax rate apply – meaning the total stamp duty to pay is £15,500. You can also use a stamp duty calculator to make it easier to determine how much you will pay.
How do I Pay Stamp Duty on a Property?
Upon completing a property purchase, the stamp duty return must be sent to HMRC and the tax paid within 14 days. Normally a solicitor will organise and do this for you, submitting your return and paying the stamp duty.
Does Stamp Duty Exist for Buy-to-Let properties?
Stamp duty exists for most properties. For landlords building a portfolio of buy-to-let property, the stamp duty bill will be higher. As mentioned above, a 3% surcharge on top of the normal stamp duty rate applies to each translation.
How to Avoid Stamp Duty on a Second Home
In certain circumstances, it is possible to avoid paying stamp duty on a second home. Some of the main exemptions for the additional stamp duty tax are the following:
- The Property is Worth Less Than £40,000
If your property is valued under £40,000, or the share of the property you buy is valued under £40,000, you won’t have to pay stamp duty.
- The Property is “Moveable”
If it is “moveable” property, such as a caravan, houseboat or mobile home, you will not have to pay stamp duty on the price of the property. These types of homes are considered “semi-permanent” in nature, and include holiday or static homes and other temporary dwellings.
- The Remaining Lease is Under Seven Years
The extra 3% charge does not apply to leases granted for seven years or less. If you purchase a property where there is seven years or less left on the lease, you won’t need to pay stamp duty on the property.
- You Inherit a 50% Share of a Property
If you inherit 50% or less of a property you are also exempt from stamp duty tax.
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.
Receive the Property as Gift
When a property is included in someone’s will or transferred to you as a gift, you will be exempt from paying 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.
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 you have sold and the amount you are asking to be repaid.
What about Joint Ownership on a Second Home?
If you are buying a property with another person and one of you has an existing property, you can avoid paying the additional stamp duty if the person without a property is the sole name on the title deed. This doesn’t apply to married or those in civil partnerships as they are treated as joint buyers.
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.