How much more tax will I pay if I wish to buy a second home? This is a question many people ask when contemplating buying a second property. Well, the tax they are referring to is stamp duty.

Stamp duty is something everyone who buys land in England, Wales or Northern Ireland must pay. It is often referred to as Stamp Duty Land Tax (SDLT). If you buy a property that will be your only main residence, you pay Stamp Duty at the basic rate. If you buy an additional property, you pay Stamp Duty at the basic rate plus a 3% surcharge on each band.

What stamp duty rates do I pay on a second home?

In the summer statement on 8th July, chancellor, Rishi Sunak, introduced a temporary stamp duty exemption on transactions of up to £500,000. This stamp duty holiday will last until 31st March 2021.

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Previously, the threshold at which homebuyers started paying stamp duty was set at £125,000.

In April 2016, the government imposed an extra 3% stamp duty surcharge on second property purchases. This extra 3% is on the total purchase price of the house, and no allowance was made on the initial £125,000.

If you’re buying a second home during the stamp duty holiday period, you’ll pay stamp duty at the revised rates plus the 3% surcharge. Meaning second home buyers and buy-to-let investors will save on stamp duty.

The higher stamp duty rate is applied to any property not used as the owner’s main residence. In other words, higher rates apply to holiday homes and buy to let properties.

The table below shows the new stamp duty rates for main residences and second homes.

Stamp-Duty-Holiday-RatesThis means if you buy a house or flat with a purchase price of £780,000 as your main residence you would pay the following in Stamp Duty:

  • 0% on the first £500,000 (£0)
  • 5% on remaining £280,000 (£14,500)
  • Total SDLT = £14,500

If you were buying the same property as a second home or a buy to let property then the cost of stamp duty would be:

  • 3% on the first £500,000 (£15,000)
  • 8% on the remaining £280,000 (£22,400)
  • Total SDLT = £37,400

You can use the HMRC’s Stamp Duty Calculator to work out how much stamp duty you’ll have to pay on your property purchase.

From 31st March 2021 the old rates will apply:

Stamp-Duty-RatesWhat properties are excluded from the stamp duty for second homes?

Some second properties are exempt from stamp duty, these include the following:

  • Properties where the purchase price is less than £40,000
  • Caravans, mobile homes or houseboats
  • If you’re planning on living in your new home but don’t sell your first immediately – in this case, you can claim a refund if you sell your old property within 3 years.

What if I plan to live in the property I’m buying?

second-homeIf you purchased a new main residence without selling your previous one, you would have effectively purchased a second home and you will need to pay the additional stamp duty charge. However, you can reclaim stamp duty on second homes, if you sell your original home within three years.

This is useful for people who sometimes struggle to sell their previous residence or those who need to relocate quickly.

How to reclaim stamp duty on a second home

The refund must be claimed through the HMRC by completing a form called “Apply for a repayment of the higher rates of Stamp Duty Land Tax”. The stamp duty refund must be claimed within 12 months of the sale of the previous main residence.

What is a main residence?

If you only live at one home, then that is your main residence. If you spend time at more than one, HMRC will decide which is your main home based on:

  • Where you and your family usually live
  • Where your children attend school
  • Where you are registered to vote
  • Where you are registered with a doctor or dentist

However, the issue of which is your main residence doesn’t really affect stamp duty. If you buy a second property you are liable for the charge, regardless of which is your main home.

What if I own a property abroad?

You will still need to pay the 3% additional stamp duty even if the only other property you own is abroad.

If you already own a main residence in the UK in addition to your home abroad, you won’t be liable for the 3% SDLT surcharge as long as you’re selling your previous main UK residence.

What if I don’t own any additional properties but the person I’m buying with does?

stamp-duty-second-homeFor stamp duty purposes all joint purchases are treated as one unit, this makes it very difficult to avoid paying the stamp duty surcharge on a second home.

Married couples & civil partnerships

Married couples and civil partnerships are seen as one unit, this means that if one person already owns a property, any subsequent purchase of residential property by either person will be seen as an additional property for both individuals.

Unmarried couples & joint purchasers

For stamp duty purposes joint purchasers are treated as one unit. This means that if one party already owns a residential property then the higher rates will be applied.

What if I am getting divorced and buying a new home?

If your marital home has been handed over to your spouse as part of the divorce settlement then you won’t need to pay the charge.

If you remain a joint owner of your marital residence, then you will be liable for the second home surcharge. However, you could claim this back if you sell your share of the property within three years.

What if I am buying a property for my children?

If your name is going to be on the deeds of the property, then you will pay the second home surcharge. If, however, you are helping your child to buy, either by giving them the deposit as a gift, acting as a guarantor for their loan or putting savings into a family offset mortgage, you won’t be liable for the charge – as long as the home will be in your child’s name and they don’t already own property.

Does the additional rate apply to leasehold extensions?

All leasehold extensions are subject to stamp duty. As the threshold at which you start to pay is £125,000, few leaseholders are required to pay the duty on their main residence. With second homes, however, the threshold is the much lower figure of £40,000, so more people are required to pay the charge.

Buying a second home in Islington or Stoke Newington?

Although the higher duty on second properties appears unfair, it should not discourage people from buying their second property in an area such as Islington or Stoke Newington. Both of these areas have a wide range of homes for sale or rent, and both have much to offer people who want to live close to the heart of London.
There is no shortage of theatres, restaurants, clubs, and bars in either area. The excellent transport links in Islington and Stoke Newington mean you are only ever a short distance from the bars and clubs of Shoreditch or the theatres and restaurants of the West End. These transport links make for a quick and easy commute to destinations like the West End or Old Street.
Despite the stamp duty surcharge, Islington and Stoke Newington are ideal locations if you want to buy a property to live in or as an investment.
For more information on properties for sale in Islington or Stoke Newington, contact us today.