How Will The 3% Stamp Duty Surcharge Affect Let to Buy?
Written on 8 December 2015 by
The following question received from a reader raises an interesting question which will be relevant to many others and so I thought publishing an answer on my blog would help others as well:
Q. My partner and I own our London flat outright, and want to buy a house to live in (i.e. as our primary residence) since we have young children and are outgrowing our current flat. We'd like to keep our flat as a rental investment, taking out a let to buy mortgage on it to use as the deposit for the new house.
Will we have to pay the 'extra' 3% SDLT announced in the Autumn statement for 2nd homes / buy-to-let properties on the new house since we already own our flat (and aren't intending to sell it)? Or would our new house just be subject to the 'normal' SDLT rate (since it will be our primary residence)?
A. Final details of exactly when the 3% surcharge will apply won't be announced until after a consultation period, which hasn't even started yet, and so it is likely to be well into the new year before we will know whether there will any exemptions for people in your situation.
However, based on what was announced in the Autumn statement anyone doing a Let to Buy will be caught, assuming you are not buying in Scotland, as that country has devolved powers on housing taxation and its rates are different.
The Chancellor's announcement was that anyone who already owns a property anywhere in the world will be subject to the 3% surcharge on any further properties they buy in England, Wales or N Ireland, regardless of the purpose of the purchase. This will apply to any completions after 31 March 2016 except where contracts were exchanged by 25 November 2015.
The only two exceptions which The Treasury has so far indicated are:
1) People who own at least 15 properties, on the basis the Government wants to encourage institutional landlords.
2) Anyone who already owns a property and buys another but sells one of them within 18 months. This is to cover the situation where people moving home can't co-ordinate the sale and purchase and also someone buying a property with a view to refurbishing it and then re-selling it. The indication is that in either of these situations the buyer will pay the 3% surcharge but will be able to reclaim it on a subsequent sale within 18 months.
Both of these exceptions are subject to the consultation and so the final rules may be different. Whilst there is always a possibility The Chancellor may decide to exempt Let to Buy doing so would seem to go against the principle of his new rule and therefore seems unlikely.
If you and your partner are married, and assuming you retain your current flat as proposed, the only ways it appears you can be confident of avoiding the 3% surcharge are to complete on the purchase by 31 March 2016 or buy in Scotland, although presumably the latter is not an option in your case.
One other possibility may be to transfer your current flat into an SPV (Special Purpose Vehicle), which is a limited company or limited liability Partnership formed specifically to acquire residential property. It is not yet clear whether this will avoid the 3% surcharge but as the flat is your principal private residence you could transfer it into an SPV without incurring capital gains tax. However, you probably would have to pay the normal stamp duty land tax (SDLT).
In view of the income tax changes announced in the summer budget there may be other benefits from 2017/18 of owning the property in an SPV, depending on your personal circumstances. You should take professional tax advice on this before making any decision but if the advice is to transfer the property to an SPV it will affect the remortgage process as many lenders to not lend to SPVs.
The reduced choice of mortgage lender may mean you don't qualify for the best value mortgage but we expect more lenders to accept applications from SPVs in the new year and so any increased mortgage payments, which will in any case tax deductible, are unlikely to sway the decision on whether to transfer the property to an SPV. If your tax adviser recommends transferring the property to an SPV we can advise you what difference, if any, it will make to your mortgage compared to leaving the property in your personal name, once we have full details of your personal circumstances.
If you are not married you have more options. In that situation it seems likely you will be able to avoid the 3% surcharge by either you or your partner owning the existing flat in a sole name and the new family home being purchased by the other person. There may be some SDLT to pay if the existing flat is jointly owned, and other tax benefits and / or disadvantages, and so again you should take professional tax advice before making a decision. Having either property in a sole name may complicate the mortgage options, depending on your individual personal circumstances, but although this might restrict the choice of lender we are usually able to arrange suitable mortgages, even in this situation.
Of course if prices fall after March as a result of the rush to buy by then the 3% surcharge might be compensated for by being able to buy at a lower price later.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and neither Charcol Limited nor Ray Boulger will accept liability for them.