How to avoid Stamp Duty on a Second Home

There are defined regulations set by the HMRC that clearly describe an individual’s primary residence. It does not always have to be the place where you spend the most time, but it is more appropriate to the following elements. If you make a real estate investment UK, the  property would have to be in the region where the person is registered as a voter, in close proximity to the person’s children’s school, in the region where the person is working as a registered professional or in the location where the person’s family spend the most time.

A second home, however, is a property that isn’t the primary residence. As clear as this may sound, the technicalities behind it can be somewhat vague. Regardless of whether you have paid off your mortgage on your home, any other property you own may be considered a second home if you have purchased it with the intention to let (buy-to-let investment), holiday home or a gift towards a family member. Moreover, even if your primary residence is in another country, any property you purchase after that will be considered a second home. Essentially, if you purchase a property and you are already on the title of a property prior to this purchase, you will be eligible to pay Stamp Duty tax.

However, if you own more than one property, but are selling your primary residence to purchase another home that will become your new primary residence, then you will only have to pay the normal stamp duty rates as this is considered as simply changing your primary residence and not as a purchase of an additional home.

For primary or main residences, the stamp duty on a property worth less than £250,000 is currently nil. A property valued above £250,000 and up to £925,000 pays a 5% stamp duty. Second-home purchases pay a different rate of stamp duty which is about 3% higher, and also begin at a lower threshold. A property valued up to £250,000 will have to pay 3% stamp duty tax if it is determined as an additional property, and stamp duty on a property valued above £250,000 and up to £925,000 will be 8% of the property’s value.

There are a few legal and safe options one can consider in order to avoid stamp duty tax on a second home, as it can understandably easily put off a buyer from acquiring a second home and expanding their property portfolio.

One option is to find a home that is valued at less than £40,000. As far-fetched as this may sound, with some good research and patience, you might come across a really good opportunity. Properties with such market values have a good chance to jump up in value in the coming years.

Another option to consider is the number of years left on the lease of the property you wish to buy. If there are seven years or less left, then the additional home tax does not apply. This will require a lot of research and investigation when doing your search, but you can save a considerable amount as extending a lease will most of the time cost less than the additional 3% stamp duty. Furthermore, moveable properties such as houseboats or mobile homes are exempt from this additional rate.

Moreover, a buyer can claim back a stamp duty payment if they sell their main residence within three years of completing a new property. Essentially, if you purchased and moved into a second home and had to let out your primary residence, you would have to pay the stamp duty, but you may be eligible for a refund later down the line. This is called the three-year rule, and this rule was extended as a result of the coronavirus pandemic, so if the buyer purchased a new home on or after the 1st of January 2017, they could still apply for a refund on the tax paid. In other words, if you are purchasing a property that you intend to use as your primary residence as a replacement for your current main residence, you are allowed a three-year grace period to sell your original main residence in order to claim back the stamp duty tax.

HMRC considers partners and married couples as one unit, so if one person already owns the main residential property and the other is buying an additional one, then it would be considered a second home, and the additional rate will be applied. So even if your partner or spouse is purchasing their first property, they will have to pay the additional property stamp duty tax. If you are living with a partner and are not married, or in a civil partnership, then you are both allowed to own or buy a first or main residence property without paying the higher rate tax. But if you want to jointly purchase a home and your or their name is already on another deed, the additional rate will apply.

If a separation or divorce occurs, and one partner is moving out of the main residence and buying another home, then the additional rate does not apply. As you intend to live separately from each other, the homes will be considered as two separate main residences.

Generally, if you are purchasing a home for your children and your name will thus be on more than one deed, then technically, you will have to pay the additional rate. There are two legal ways to avoid this, and this is by either gifting a deposit to your child, and they will then arrange the mortgage in their name or acting as a guarantor, which isn’t classed as the property owner.

There are only a few situations where you may be eligible for a refund on stamp duty paid. As mentioned previously, you may be eligible if you sold your main residence within a three year period of buying a new main residence. Also, if you have paid or overpaid the stamp duty by mistake or you have applied for the refund in under three months after selling your main residence. You will have to submit your tax details to HMRC, and you can do so online on the relevant department’s website. Subject to approval, you should normally receive the refund within fifteen days of the application. If you have any queries do contact us.