The 3% SDLT surcharge on second homes

Over Christmas the Treasury issued their promised consultation document on the 3% SDLT surcharge that comes into effect on 1 April 2016.

This surcharge will apply to:

  1. the second residential property purchased by an individual;
  1. any residential property purchased by a company;
  2. any residential property purchase by a discretionary or accumulation trust, and
  3. some residential property purchases by an interest in possession trust.

For an individual, the initial test is ‘Do you (or you and/or your spouse or civil partner) own more than one residential property at the end of the day on which you buy such a property?’

If the answer is ‘Yes’, there are two escape routes:

  1. The surcharge does not apply if the new property is ‘replacing a main purchase which is being sold’.
  2. There are a number of situations in which a property is treated as non-residential, namely:
  • if a property is worth less than £40,000, it can be ignored;
  • if six or more residential properties are bought in a single transaction, that transaction is regarded as not being the purchase of residential properties, and
  • if a property has both residential and non-residential elements (or a residential and a non-residential property are purchased in a single transaction) the transaction is regarded as a non-residential transaction.

Unfortunately, there are a number of tax traps to the replacement main residence exemption:

  1. The individual must previously have owned a main residence. If the previous main residence was rented (or leased on a short lease which had a value of under £40,000) the exemption will not apply.
  2. The previous residence must have been sold. If it is retained and becomes a rental property, the exemption will not apply. If it was gifted to someone, such as the donor’s children, the exemption again probably does not apply.
  3. What constitutes a person’s ‘main residence’ is a question of fact. Any CGT election that may have been made is irrelevant. Where a person has two residences, such as a weekend home and a pied-a-terre near his work, it is often not clear which is the main residence. Getting it wrong can trigger a penalty for underpaying the tax.
  4. The relief applies even if the original main residence was sold before the new one is bought, but only if it was sold within the 18 months prior to the purchase of the new residence (which probably means the completion date, not the contract date) and the new property is bought as an intended main residence.
  5. It also applies if the original residence is sold after the purchase of the new one but again, only if the sale takes place within the following 18 months and only if it is established that when the new property was purchased, it was intended that it should become the main residence. If the sale of the original residence takes place after the purchase of the new, the 3% surcharge has to be paid on a provisional basis and a claim for a refund of the excess made when the original residence is sold.
  6. Where a person has more than one residence, whether the new property is his main residence, is again a question of fact.

Special situations

Married couples and civil partners

These are treated as a single person unless both:

  1. the marriage has broken down, and
  2. they are separated under a court order or a formal Deed of Separation executed under seal.

Joint purchasers

Where there are joint purchasers, the 3% surcharge has to be paid if any of them owns another residence.


Partnerships are treated as joint purchasers (being the partners), so the 3% surcharge applies if any individual partner has another residence.

Overseas properties

Overseas properties need to be taken into account, so a non-resident who purchases a buy-to-let property will pay the 3% surcharge if he owns his own house in his home country.

Inherited properties

These are of course relevant in deciding whether a person owns more than one residence.

Caravans and houseboats

These are not regarded as residential property, even if the houseboat is the owner’s main residence.

Purchases of six or more residential properties in a single transaction

These are treated as non-residential for SDLT, but multiple dwellings relief limits the tax charge to that which would have applied if the properties had been bought individually and each had cost the same proportion of the overall price. The 3% has to be added to the tax payable where multiple dwellings relief applies.

Large-scale investors

There will be an exemption for large-scale investors who make a bulk purchase of at least 15 residential properties in one transaction.

Interest in possession trust

A property in an interest in possession trust will be treated as owned by the life tenant, so if he owns another property the trustees will pay the 3% surcharge, and if he buys his own property he will pay the surcharge as he already ‘owns’ the trust property.

Discretionary or accumulation trusts

Any purchase by a discretionary or accumulation trust attracts the 3% surcharge, but the trust property does not need to be taken into account on a purchase by a discretionary beneficiary.

Note: If a discretionary trust allows a beneficiary to occupy a trust property rent-free, that will normally create an interest in possession in the property.

Some anomalies

Example 1

Jane is 24. Her father died a year ago and, to utilise his IHT nil rate band, left each of Jane and her three siblings £20,000 and a one-eighth interest in the family home which is occupied by Jane’s mother. Jane has been paid the £20,000 and used it as a deposit to buy her first house. On the evening of Jane’s completion, her father’s executors met for dinner with their solicitor. At the end of the meal, getting on for midnight, the solicitor suggested that the executors should formally assent the property to the beneficiaries, which they duly did. At midnight on the day of completion, Jane has an interest in two residences so must pay the 3% surcharge (at least that is probably the case, as it is not clear whether ‘joint owners’ is synonymous with ‘joint purchasers’).

Suppose that at the dinner, one of the executors had suggested that they have another brandy before making any decisions and, as a result, the assent was not given until after midnight. Jane would not have to pay the 3% surcharge as she did not have an interest in the family home at midnight (at least, she probably didn’t, even though for CGT she is deemed to have inherited at the date of death).

Example 2

Ann’s father is anxious for Ann to get a foot on the housing ladder. He lends her £50,000 which she uses to put a deposit on a flat. She takes out a mortgage for the balance, which her father guarantees; Ann does not have to pay the 3% as she has only one residence.

Ann cannot get the mortgage, but her broker tells her that he can get her a mortgage if her father takes a small interest in the house, as the bank will then be willing to lend to them jointly. Her father agrees and contributes his £50,000 for a 5% interest in the flat. Ann has to pay the 3% because her co-purchaser has two properties as he owns his own house.

Example 3

Jack and Jill were childhood sweethearts. They married at 16 but the marriage failed and Jack left the family home - which was wholly owned by Jill - when he was 24 and moved into rented accommodation. They never formally separated and have remained friends. Jack is now 40 and has decided to buy his first house. Jack has to pay the 3% because he is married to Jill, albeit that they separated 16 years earlier, as she owns another residence.

For further detail on this and other scenarios, see Property Taxes 2015/16, to be published in February 2016 by Bloomsbury Professional (

Robert W Maas FCA FTII FIIT TEP is a tax consultant at CBW Tax. He is one the UK's leading experts on taxation, and is an experienced writer and speaker. He is author of Property Taxes 2015/16 and also Taxation of Employments, Tax on Transactions and Guide to Taxpayers’ Rights and HMRC Powers.

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Written by Ellie MacKenzie

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