When first-time buyers are looking to purchase a home, one of the most significant issues they will face is afford it. Many factors come into play when calculating the property cost, and for those who are considering buying a buy-to-let property.
It is important to understand that Stamp Duty rates1 are different for a buy-to-let property, second home properties and exempt properties.
Buy-to-let Stamp Duty Rates: If you buy a property intending to let it out in exchange for rent, rather than live there yourself (known as ‘buy-to let’), you face different rates of tax when purchasing your next investment. There are two sets of rules; one set applies if your previous property purchase was made before 22nd November 2017. These are known as old stamp duties, while the other uses after that date and is called new stamp duties. The old stamps affect purchases up to £125,000, and the new rules apply to those over £40,000.
Second Home Stamp Duty Rates: If you’re purchasing a second property for your use or as an investment that is not likely in the short term anyway be occupied by someone else (known as ‘second home’), then you are subject to different rates of stamp duty than if it were your primary residence. The old stamps affect purchases up to £250,000 while the new ones only come into play at properties worth more than £160 000 pounds on the purchase date.
Exempt Properties/ Zero-rated properties: These include homes that have been owned for more than two years, newly built or renovated homes, houses explicitly designed to accommodate people with disabilities and those on assisted living schemes, student halls of residence etc. As long as these properties are not let out for more than six months during the year, they will be exempt from Stamp Duty.
Calculating Your Buy-to-Let Stamp Duty Rates
First, you need to determine the property type you’re purchasing – residential or commercial. If you’re buying a house that will become your main home, then this rule does not apply as there are no second homes stamp duty rate; however, if you want to purchase an investment property, then first check whether it falls into one of the following categories: holiday let, furnished rental properties, student letting agency. These properties don’t qualify for any exemptions, so you will need to pay the total rate of the stamp duty in this case.
If your property falls into one of these categories, you’ll be liable for a higher second homes stamp duty rates at least 15%. There are certain instances when there is no increased charge if you purchase through a leasehold company and live in the same building as someone else who pays over £125000 per year rent or buy from an individual with more than half their property income renting out. If this applies to you, contact HMRC to advise what documents should be supplied before buying.
Buy-to-Let and Second Home Stamp Duty Rates
Buy-to-let or second home stamp duty rates apply to rented properties and, secondly, those used as holiday homes or a family residence.
The first type of rate is calculated at 0% on purchases up to £125,000 or where the consideration was under £100,000. However, there is an additional rate of 3% on any property purchase over this sum, with a maximum cost being £175,000. For example, if you bought a buy-to-let property worth £150 000, then your total stamp duty bill would be around £60, but if it were worth £250 000, then it would be closer to £900.
The second type of rate is calculated at 15% on purchases up to £250,000. There is an additional rate of 3% for any property cost more than this sum with a maximum of £350,000. For example, if you bought a buy-to-let property worth £300 000, then your total stamp duty bill would be around £2000, but if it were worth £450 000, then it would be closer to £3250.
However, there are exemptions from these rates for people who have already paid higher rates due to owning another property or living in the area where they want to purchase their next home, which means you may not still have to pay the complete 15% even if you are purchasing a second property.
Paying Stamp Duty Surcharge
To cool the buy-to-let market, the government increased stamp duty on second property transactions in April 20162. The higher rate is 3% higher than stamp duty which applies to the total purchase price. It translates to a 3% slab tax based on the total property price, payable in addition to the regular stamp duty. The surcharge is not applied to properties bought for less than £40,000.
The 3% buy-to-let surcharge was aimed at investors and second-home buyers to free up more property for people who are struggling to find a single home. However, it isn’t that easy, and other forms of buyers have affected as well, such as property developers. These people are moving in together, divorcing or separating homeowners, parents assisting their children to buy properties. These homeowners are having difficulty selling their homes and owners of property overseas.
Buy-to-Let Stamp Duty Exemptions
Married Couples and Civil Partnership
Married couples and civil partners are considered as one individual. Hence, they can get an exemption to buy-to-let stamp duty. The only time this isn’t the case is when married couples are living apart and have no intention of reuniting.
Stamp duty rates for joint purchasers to buy-to-let properties are higher than stamp duty rates on the single purchaser or sole traders. Joint purchasers can only get relief from the additional surcharge if they have been in business together for two years before purchasing. For example, if one of them has sold their shareholding in an earlier business venture that was run as a partnership. For instance, where each partner contributed £50k and agreed to split profits 50/50, this would not qualify as ‘in trade together’.
However, if you have been running your successful side project alongside your day job employing others. At the same time, you both work for the same employer on a freelance basis, then this will count as being ‘in trade together, and you’ll be able to claim joint relief from stamp duty.
Moving To A New House
If you’re not planning on living at your property for any length of time and intend to let it out as a Buy-To-Let investment, then there is a way that you can be exempt from paying the higher Stamp Duty rates. The exemption applies if you are an investor or landlord letting out residential accommodation; you own more than one residential property and do not live with tenants. Either one of these properties is rented by someone else, or you rent one or two rooms within your primary residence. Still, you don’t live in them, nor share them with your tenant.
The exemption will only apply if the landlord does not live in either of these properties. If they do, then the higher rates will apply to them and their spouse, civil partner, or cohabiting partner whose primary residence is one of those two properties.
Properties Excluded from Buy-to-Let Stamp Duty
It doesn’t matter whether you’re buying your first, second or third property – as long as all properties (both buy-to-let and personal homes) meet specific criteria requirements. You’ll receive tax relief on stamp duty rates regardless of how many houses you own.
However, there’s an exception to this rule: You must have owned each house for at least 18 months from when it’s purchased before claiming exemption against other residential purchases within that timeframe. In other words, if you’ve only owned one previous home but want to buy another now, it’ll only be exempt if it’s been 18 months or more from the last purchase. Also, this exemption doesn’t apply if you’re buying another home to use exclusively for work purposes.
Holding Financial Interest in a Property
When you hold some form of financial interest in a property, it’s possible to be exempt from paying stamp duty. A non-resident who owns a second home for personal use and not for sale is entitled to an exemption that would usually apply if they spent less than six months out of the year living there.
Other exemptions exist, such as when properties are being transferred between spouses or civil partners without consideration given by one party to the other or where rights over land have been granted gratuitously. Stakes are gifted on death. No capital gains tax will need to be paid either, but this could provide deferred taxation depending on how long someone has owned their stake before passing away.
Do I Pay Additional Stamp Duty if I Own a Buy-to-Let?
The additional stamp duty rate is paid in addition to the regular stamp duty on any property. As a result, a buy-to-let property would cost you more in stamp duty than a regular home.
Why Is There a Higher Stamp Duty Tax on Buy-to-Let Properties?
After a booming buy-to-let market in the UK led to a housing crisis that has pushed homeownership out of reach for millions of people, the government declared in 2015 that a new 3% extra stamp duty rate would be implemented for those purchasing a second home.
How Can I Claim Back the Stamp Duty Surcharge After Buying a Second Property?
You have two options for requesting a refund from HM Revenue and Customs (HMRC): Filling out their online questionnaire on Gov.uk, or filling out the form, printing it out, and mailing it to them.
What Happens with Stamp Duty if I'm Buying a New Home and Have Not Sold My Current One?
The surcharge is payable if you purchase a home to move into before selling your current home for some reason. Still, you can apply for a refund if you sell the first home within three years. Exception: If you want to buy another property when going through divorce proceedings, you will be excluded from the surcharge, allowing you to continue with your new purchase without paying a tax before your divorce is finalised.
Buy-to-Let Stamp Duty Rates is a tax on purchasing a second home or flat to rent out and make money as an investment. However, there are exemptions and options to avoid higher rates. You can get more information by contacting an expert directly before making any purchases, so it’s worth getting some advice early on.