Can I avoid paying the 3% stamp duty surcharge?

John Shallcross is a Stamp Duty Land Tax specialist in the Built Environment team at the national law firm Blake Morgan.

Here he discusses the 3% surcharge on second homes, when you do have to pay it - and when you don't.

You can find more detail on the replacement of only or main residence rules at the Blake Morgan website.

The comments section of Zoopla’s Q&A on 3% Stamp Duty Land Tax (SDLT) also has many questions from people who are buying a house or flat to live in, but who have interests in other property.

What is the 3% stamp duty surcharge?

If you are buying a second home, you will usually have to pay the higher rate of SDLT. This applies to purchases including holiday homes and buy-to-let investments.

It's a 3% loading on regular stamp duty rates, which are set out in the table below.

The 3% stamp duty surcharge: can it be avoided?

If you are buying a home that you intend to live in as your main home, then the higher rate of SDLT will not apply, provided you have sold your existing home before you buy your new home (or on the same day). However, if you have not yet sold your original main residence then you must pay the higher rate when buying a new home. But if you sell or give away your previous main home within 3 years of buying your new home, you can apply for a refund of the higher SDLT rate from HMRC.

It is important that:

1. The buyer (or sometimes a spouse) previously owned a home which was the buyer's only or main residence, meaning they had actually lived there

2. This home has been sold or otherwise disposed of

3. The new property is intended as the buyer's only or main residence. (ie. the buyer must intend to live there)

For a property to be a person’s 'residence', there is a degree of permanence required and an expectation of continuity.

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Buying a home, having previously sold one

There is particular confusion where you have sold a main residence in the past and are preparing to buy another one.

26 November 2018 and the three year rule

The magic number here from 26 November 2018 is three years – and this is why.

With effect for purchases completing after 26 November 2018, the legislation imposes a three-year time limit by which the purchase of your next only or main residence should be completed, following the sale of a former only or main residence, if you are to escape the 3% surcharge.

Additionally, the former residence must have been your only or main home (you must have lived there) at some point during the three years leading up to the purchase of the new one.

However, for purchases which completed before and up to 26 November 2018, these three-year rules did not apply to this kind of case (where the sale completed at the same time or before the purchase).

In other words, you could have sold your main residence many years ago, and not be liable for the 3% surcharge if you completed your purchase of another one by 26 November 2018.

Although the position can be complicated (particularly if you are married or in a civil partnership) the exception from the 3% surcharge for a replacement of only or main residence can come to the rescue and save you thousands.

The difficulties in applying the rules correctly are demonstrated in this case study, where the buyer of a property had lived in another property she owned between selling a previous home and buying a new home.

But she was still entitled to rely on the replacement exception.

Following much lobbying the guidance on this area has been greatly improved from August 2018.

The much-improved guidance in the Manual on this point starts here and you can find the November 2016 Guidance Note, which has now been archived, here.

What if I sell part of a share in a previous home?

A hot topic for debate used to be whether it was enough to dispose of a part of a share in a previous home, rather than all of it, or whether it worked to sell or gift it to a spouse. 

Those weaknesses in the legislation have been addressed by the Autumn Budget of 2017.

For purchases completing from 22 November 2017 it is necessary to dispose of all of the interest in a previous home (nor does it usually work if a spouse or civil partner retains an interest). 

Any remaining uncertainties as to whether a share in a property counts as a 'major interest' have been dealt with in the Budget of 29 October 2018 with immediate effect for purchases completing on or after that date.

What if my partner or spouse owns another property?

Another issue is around how spouses and civil partners are addressed.

HMRC's brief guidance used to say: 'You may be viewed as the owner of a property if it’s owned by your spouse or civil partner'.

This is not what the legislation says and this guidance is capable of leading taxpayers astray.

There are special rules for spouses and civil partners, but it can be misleading to say they are treated as a single unit.

To demonstrate how the three-year rules work in more detail, we have adapted some real-life scenarios from the comments section of our SDLT Surcharge Q&A and provided answers to each.

Scenario 1: A married couple return from abroad

Question: My wife and I left England six years ago to work abroad.

Before we left, we sold our home which had been our main residence up until that point, having lived in it for many years. 

While overseas, we lived in accommodation provided by our employers.

We returned to England in early 2018 and completed the purchase of our new main residence in October 2018.

However, we each have other property interests and were told we had to pay the 3% SDLT surcharge. 

We paid the extra money, but is this correct and can we recover it?

Answer: Some of the original HMRC guidance suggested that you cannot rely on the replacement of only or main residence exception to escape the 3% surcharge here because you sold your previous home more than three years before your purchase.

However, the relevant three-year rules did not apply to purchases completed by 26 November 2018.

So you should have escaped the surcharge as you bought a new house in England intending it to be your only or main home and completed the purchase by 26 November 2018.

You could apply to HMRC for a refund of the extra tax paid.

Scenario 2: An unmarried couple buy a home together

Question: My girlfriend and I are about to buy our first house together for us to live in as our only home.

She has no other property interests, but I have several properties that I let out.

I have been living in rented accommodation for the last two years since selling my previous home (which I had lived in up until then).

Will we be hit with the surcharge because of my other property interests?

Answer: So long as you complete the purchase of your property within three years of having moved out of your previous home, you should not have to pay the surcharge.

This is because of the application of the ‘three-year rules’ (which state you should have sold a previous main residence within the three years prior to the new purchase).

Scenario 3: We're about to get married and buy home together

Question: I am getting married in the next few weeks, then my new husband and I will buy our first home together and move in.

It will be our only residence but we each have a number of let properties. 

He has just sold the house he has been living in for many years and which I have lived in with him for the last year. 

But I will keep the house that I lived in until last year and which I plan to continue to rent out for at least another two years.

Do we have to pay the surcharge on the new house?

Answer: Yes. Because you were not married to each other when your intended sold his house, you cannot rely on his sale to get the benefit of the exception for the replacement of only or main residence.  

It sounds as if you might sell what used to be your only home within three years of the purchase of your first home together.

You might then be able to claim the surcharge back.

Three-year rules apply in this scenario where you buy your new property before you sell your old one.

So, as well as selling your old house within three years after the upcoming joint purchase, you would also need your upcoming joint purchase to be within three years of you last living in what had been your main home.

Scenario 4: I'm keeping the old house for a while

Question: I have retained what used to be my only residence (I lived in it for many years) but have let it out for the last seven years while living in job-related accommodation.

I am about to complete on the purchase a new house and move straight in (I will live in it as my only residence) but want to retain the old one until the present tenant is ready to leave, which he says will be in about a year.

Do I need to pay the surcharge for now, but then can I reclaim it if I sell what was my only home within three years of the purchase of the house I am about to buy?

Answer: Yes, you have to pay the surcharge.

But no, you will not be able to reclaim it.

The three-year rules catch you out.

You have not lived in the old house at any time in the last three years up to the purchase of the new house.

So you will not be able to reclaim the surcharge, even if you sell the old house within three years of the purchase of the new house.

It's worth noting that the government is relaxing one of the three-year rules for reclaiming the Stamp Duty surcharge where the old home is sold after the new home is bought.

An amendment has been introduced to the Finance Bill to allow an extension in exceptional circumstances, such as the coronavirus crisis. 

The extension is to the time limit within which the old home is sold, following the purchase of the new home.

For more information, check Zoopla’s 3% surcharge Q&A.

Scenario 5: I'm separated but not divorced

Question: I am separated from my wife, but we are not divorced.

The house we used to live in together has been sold.

She has bought a flat to live in using her share of the proceeds.

I am about to I buy a new home to live in as my only residence, but I own other properties.

Can I use the exception for replacement of only or main residence to escape the surcharge?

Answer: Yes. You can use the exception even though your wife has already bought a new house after the matrimonial home was sold (so long as her new house was not intended as your only or main residence and you are now separated in circumstances likely to prove permanent).

This article is intended for general information purposes only and does not constitute legal or professional advice.

Advice should be sought before proceeding with any transaction. The same applies to postings made to the comments section of Zoopla's website.

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