How to Avoid Stamp Duty on a Second Home
While it is generally not possible to completely avoid paying stamp duty on a second home, there are ways to reduce the amount you pay and certain circumstances where stamp duty exemptions apply.
When purchasing a second home, stamp duty is a significant consideration that can have a substantial impact on your overall budget. Understanding the basics of stamp duty and how it applies to second homes is essential for informed decision-making.
In this guide, you will gain insights into the following key aspects:
- The Basics of Stamp Duty: Familiarize yourself with the fundamental principles of stamp duty. Including how to calculate it based on the property’s value and the applicable tax rates.
- Application of Stamp Duty to Second Homes: Understand how stamp duty applies specifically to second homes. In most cases, purchasing a second home attracts higher stamp duty rates compared to buying a primary residence.
- Reducing Stamp Duty Amount: Discover various strategies to reduce the amount of stamp duty you are required to pay. This can include taking advantage of tax reliefs, such as the Residential Property Rates for multiple dwellings or considering shared ownership options.
- Exemptions for Second Homes: Explore specific circumstances where exemptions from stamp duty may apply to second homes. This can include situations where the property meets certain criteria. Such as being below a specific price threshold or you buy it as a replacement for a main residence.
By familiarizing yourself with the intricacies of stamp duty and understanding the options available to reduce or exempt the amount you need to pay, you can make informed decisions when purchasing a second home.
What is Stamp Duty?
Stamp Duty Land Tax, commonly known as Stamp Duty, is a tax on property purchases in the UK, including both houses and land. This tax applies to various types of property transactions, including the purchase of freehold or leasehold properties, whether outright or with a mortgage, and even shared ownership schemes.
The amount of stamp duty you are required to pay is determined by the purchase price of the property and the corresponding tax bands. The rates can vary depending on whether it is your first or second home and whether you are a first-time buyer. The tax bands and rates are set by the government and subject to periodic revisions.
In response to the COVID-19 pandemic, the UK government introduced a temporary stamp duty holiday in July 2020. This measure aimed to stimulate the property market as the country emerged from the initial lockdown.
The stamp duty holiday had a notable impact on the housing market. Many buyers and sellers took advantage of the tax break, leading to increased activity and rising house prices in 2020 and 2021. However, as the stamp duty holiday came to an end, there was speculation that the market may experience a slowdown, with decreased demand from buyers aiming to benefit from the tax savings. This anticipation has led some experts to suggest that certain areas may witness a decline in property prices.
It’s important to stay informed about the current stamp duty rates and any potential changes in regulations that may affect property purchases. Consulting with a qualified tax advisor or property professional can provide you with the necessary guidance and ensure compliance with stamp duty requirements when buying a property in the UK.
Stamp Duty Rates For First-Time Homebuyers in 2023
In an effort to support homebuyers and stimulate the property market, the UK government has implemented temporary changes to the Stamp Duty Land Tax (SDLT) thresholds. These changes aim to reduce or eliminate the amount of SDLT payable by purchasers of residential properties from 23 September 2022 to 31 March 2025.
One significant change is the increase in the residential nil-rate tax threshold from £125,000 to £250,000. This means that homebuyers can now pay up to £250,000 for a residential property before becoming liable for SDLT. This increase allows buyers to save on the tax burden, particularly for properties in the lower price range.
Moreover, the nil-rate threshold for First-Time Buyers’ Relief has been temporarily increased from £300,000 to £425,000. This relief applies to first-time buyers purchasing a residential property, and it means that the first £425,000 of the property’s value will be exempt from SDLT. Additionally, the maximum property value eligible for First-Time Buyers’ Relief has been raised to £625,000. This adjustment enables first-time buyers to benefit from reduced SDLT liabilities when purchasing properties within the increased threshold.
These measures have a positive impact on residential property purchasers by reducing the SDLT burden or eliminating it altogether, depending on the property’s value and the buyer’s eligibility for relief. The temporary nature of these changes highlights the government’s intention to support the property market during a specific timeframe.
|Property value||SDLT rate|
|Up to £425,000||Zero|
|The next £500,000 (the value between £425,001 to £925,000)||5%|
|The next £575,000 (the value between £925,001 to £1.5 million)||10%|
|The remaining amount (the value above £1.5 million)||12%|
Does Stamp Duty Apply to Foreign Investors?
Stamp Duty does apply to foreign investors who are non-UK residents. When purchasing property in England, overseas investors are subject to a 2% stamp duty surcharge. This surcharge applies to all “non-resident transactions” and is applicable regardless of the type of property being purchased or whether the investor already owns a property.
The 2% stamp duty surcharge is an additional rate imposed on top of the existing stamp duty tax and is calculated based on the value of the property being acquired. However, it is worth noting that if the overseas investor qualifies as a first-time buyer in the UK, they may be eligible for the first-time buyer tax rate.
It is important for foreign investors to be aware of these stamp duty regulations and factor them into their financial calculations when considering property investments in England. Seeking professional advice or consulting with a tax specialist can provide further guidance on the specific implications and requirements for non-UK residents investing in UK properties. Find out more about being a foreign investor in UK property in this article.
Want to get down to the nitty-gritty bits of SDLT for foreigners, this article is for you!
Stamp Duty on Second Homes
For second-home buyers and buy-to-let landlords, the Stamp Duty rates have undergone changes that came into effect on 23rd September 2022. While these groups are subject to the new rates, they are still required to pay the additional 3% levy introduced in April 2016 specifically for additional homes. The following rates now apply to second home and buy-to-let Stamp Duty:
|Property value||SDLT rate|
|Up to £250,000||3%|
|The next £675,000 (the value between £250,001 to £925,000)||8%|
|The next £575,000 (the value between £925,001 to £1.5 million)||13%|
|The remaining amount (the value between £1.5 million)||15%|
These revised rates reflect the government’s approach to taxation for second-home purchases and buy-to-let investments. The additional 3% levy acknowledges the impact of these types of transactions on the housing market and aims to balance the interests of both homeowners and property investors.
It’s important for second-home buyers and buy-to-let landlords to be aware of these rates and factor them into their financial planning when considering property acquisitions. In addition to paying stamp duty on a second home, other taxes may apply to second properties:
- 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?
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.
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 costs less than £40,000, or the share of the property you buy is under £40,000, you won’t have to pay stamp duty.
The Property is “Moveable”
If it is a “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.
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.
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.
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.