Are you looking to purchase a second property in the UK? Given the considerable price of buying a home, you’ll probably want to know how much you will have to shell out for taxes on top of your deposit.
When one purchases a second property in the UK, the tax that must be paid is known as stamp duty. Stamp duty is a progressive tax that increases the percentage that someone must pay based on the price of the property that someone is purchasing.
Stamp duty is not a flat rate tax, which makes paying it slightly more complicated. Also, there are some cases in which you may not have to pay any stamp duty land tax at all on a second property. This guide will try to help you figure out just how much you would need to pay in taxes for a second property you are eyeing up!
Which Second Properties Require Stamp Duty to be Paid
Caravans, mobile homes, and houseboats are all exempted from stamp duty for both first and second-time property buyers, as well as any property that is worth under 40,000 pounds.
Those who own a property overseas must be the higher second property stamp duty, even if they have not yet purchased any other property in the UK. In addition, whether or not you or your partner was the one who technically bought your first house or property together if either of you purchases another property, it will be considered your second as far as stamp duty goes. (Source)
Stamp Tax Explained
Stamp tax is the tax that you must pay when buying a home or property in the UK. The stamp tax applies to both freehold and leasehold properties. While the stamp tax must be paid by anyone purchasing property that is worth more than 500,000 pounds, the stamp tax for secondary properties is more significant, and there are virtually no exemptions available for second-time buyers.
First-time buyers don’t pay any stamp tax for properties that are worth under 300,000 pounds and also pay discounted rates for amounts above that.
Buy-to-let properties are always charged second property stamp duty, even if they are your first property purchase.
The only exemption for a second property is for those properties which are worth less than 40,000 pounds, which likely doesn’t happen often. Stamp duty is applied based on when you purchase your property and the rates change from time to time.
The following are the current rates for stamp tax on someone’s first property purchase. This will be important if you fall into one of the exemptions that we will discuss later.
| Property or Lease Premium or Transfer Value | SDLT Rate |
|---|---|
| Up to £125,000 | Zero |
| The next £125,000 (the portion from £125,001 to £250,000) | 2% |
| The next £675,000 (the portion from £250,001 to £925,000) | 5% |
| The next £575,000 (the portion from £925,001 to £1.5 million) | 10% |
| The remaining amount (the portion above £1.5 million) | 12% |
Stamp Tax Rates Explained
Stamp tax rates for second properties are the normal stamp tax rates +3%. The current stamp tax rates are shown in the table below.
| Minimum Property Purchase Price | Maximum Property Purchase Price | Stamp Duty Rate (only applies only to the part of the property price falling within each bracket) |
|---|---|---|
| £0 | £125,000 | 3% |
| £125,001 | £250,000 | 5% |
| £250,001 | £925,000 | 8% |
| £925,001 | £1.5 million | 13% |
| Over £1.5 million | 15% |
There is a 15% Stamp Duty Land Tax that is paid on the whole price when the entity purchasing a property is a company or other ‘non-natural persons’. (Source)
In addition, there is a surcharge of 3% for any companies that are purchasing a residential property. Also, as of the first of April, 2021, those who are not citizens of the UK are responsible for paying an additional 2% surcharge on top of the regular Stamp Duty Land Tax that they already have to pay. This surcharge applies to all freehold properties, and it also applies to the majority of leasehold properties as well. The leasehold properties that require this surcharge are as follows:
- Those which cost over 40,000 pounds
- Those that have 7 years or more left on the lease
- If any of the buyers are non-UK residents, even if some of them are
However, in the case that those in a civil union or a married couple is purchasing a house in the UK, and one of them is a UK resident and they are not separated (and neither is a trustee of settlement), then the property purchase will be treated like normal, and the surcharge of 3% will not apply.
Once again, note that both the thresholds for the different stamp duty rates and sometimes even the rates themselves do change from time to time, so if you are looking at purchasing a house, keep that in mind, as you may end up paying more or less as a result. For example, the thresholds were raised briefly as a result of the Covid-19 Pandemic, but have since been lowered once more to their previous numbers.
How is Stamp Duty Paid?
Stamp duty is a progressive tax, meaning that you pay increasing amounts based on the brackets in which the money you are paying for your property falls into.
For example, say that you are purchasing a home that is worth 260,000 pounds. You would pay 3% on the first 125,000 pounds, then you would pay 5% on the next 125,000 pounds, then finally you would pay 8% on the final 10,000 pounds, which in total would amount to 10,800 pounds. The stamp tax certainly is significant when purchasing more expensive properties.
For help with paying stamp duty, you can ask your solicitor. Stamp duty must be paid within a timely manner, that is 14 days within the completion of your purchase. In general, your solicitor will handle the filing of your stamp duty tax, and they will also help you to file for any exemptions that you may apply for.
Notes for New Leasehold Property
When purchasing a leasehold property, the typical stamp duty landholder tax will have to be paid on the lease premium. If the total cost of rent over the course of the life of the lease exceeds the threshold for paying stamp duty, then you will end up paying 1% of the cost of the rent after it exceeds that threshold.
When You Are Replacing Your Primary Residence
If you are selling your primary residence/home in order to buy a second one, you will only pay second property stamp duty land tax if you have not sold your primary residence before the completion of your purchase of the replacement property. However, you can file for a refund if you do end up selling your primary residence within 36 months. This refund will simply be for the difference in rates, as in this case, you will just have to pay first-time property buyer rates instead.
In Case of Divorce
If property has been transferred to you as the result of a divorce, then unless you have filed a Property Placement Order, you may be considered as having a primary residence already when you go to purchase your own property.
Avoiding Stamp Duty
Trying to get around paying stamp duty entirely is a serious crime, but there are some ways to legally avoid paying the second property stamp duty rates in a very limited set of circumstances. One of the ways you can try to get around it is if you are buying a home for a family member. This can be achieved in several different ways:
- You can give the family member money for the deposit as a gift. As long as they qualify for the mortgage, then the home will be considered their primary residence rather than your second home, even considering that you technically paid for a large portion of it.
- You can be a co-guarantor for the purchase of a home, in which case you will not own the home, but you will be responsible for payments if the one who you are signing for becomes unable to make their own payments. This is definitely something you’ll have to think carefully about, as it is nearly impossible to get out of your responsibilities as a guarantor, and doing so can become a significant financial burden.
- A family offset mortgage is a special kind of mortgage aid that is used to help family members offset the cost of buying a home. The way it works is that you place money in a special account (only certain banks offer this kind of mortgage), and that money is used to cover part of the mortgage for a home. If your family member is purchasing a 500,000 pound house, and you put in 300,000 pounds, they will only have to pay interest on the remaining 200,000 pounds. You eventually get the money back once a certain percentage of the cost of the mortgage has been paid off by your family member. (Source)
In the vast majority of cases, you will have to end up paying stamp duty no matter what. In the case of you purchasing a property for yourself, you will most definitely almost always have to end up paying for it. And if you are purchasing property on behalf of a corporate entity, there are even fewer ways to avoid the stamp duty land tax and other fees associated with buying property. Make sure to consult with your solicitor or another trusted professional in order to determine your own liability.
Other Exemptions for Paying Stamp Duty Land Tax
You don’t have to pay any stamp duty tax in the following cases:
- When no money or property is exchanged in the process of transferring property
- Your property is being left to you in a will
- You’re receiving property as part of a divorce
- Whenever you buy a new or assigned lease of 7 years or more, if the premium is less than 40,000 pounds and the yearly rent is less than 1,000 pounds
- You purchase a new or assigned lease of less than 7 years, when the amount you pay is less than the residential threshold or non-residential threshold of SDLT.
- In the case that you are using alternative financial arrangements to comply with religious beliefs.
What is ATED, or the Annual Tax on Enveloped Dwellings?
The Annual Tax on Enveloped Dwellings is a tax paid yearly for properties that are worth more than 500,000 pounds and are owned by companies or other ‘non-natural persons’. The charge varies, but it can end up being quite expensive.
What is a Dwelling for the Purposes of Paying ATED?
Dwelling includes any property that is or could be used as a place for people to live, although there are some specific exceptions for the purpose of this tax.
These exceptions include:
- Hotels
- Guest houses
- Boarding school accommodation
- Hospitals
- Student halls of residence
- Military accommodation
- Care homes
- Prisons
Current ATED Rates
| More than £500,000 up to £1 million | £3,800 |
| More than £1 million up to £2 million | £7,700 |
| More than £2 million up to £5 million | £26,050 |
| More than £5 million up to £10 million | £60,900 |
| More than £10 million up to £20 million | £122,250 |
| More than £20 million | £244,750 |
Previous Rates for Recent Years
Amounts for 1 April 2021 to 31 March 2022
| Property value | Annual charge |
|---|---|
| More than £500,000 up to £1 million | £3,700 |
| More than £1 million up to £2 million | £7,500 |
| More than £2 million up to £5 million | £25,300 |
| More than £5 million up to £10 million | £59,100 |
| More than £10 million up to £20 million | £118,600 |
| More than £20 million | £237,400 |
Amounts for 1 April 2020 to 31 March 2021
| Property Value | Annual charge |
|---|---|
| More than £500,000 up to £1 million | £3,700 |
| More than £1 million up to £2 million | £7,500 |
| More than £2 million up to £5 million | £25,200 |
| More than £5 million up to £10 million | £58,850 |
| More than £10 million up to £20 million | £118,050 |
| More than £20 million | £236,250 |
Hiring a Solicitor
While you are not technically required by the law to utilise the services of a solicitor, it is highly recommended to at least consider hiring one when you are looking to purchase property in the UK. Purchasing property, and especially purchasing multiple properties can be a complicated ordeal, and having someone to help check off the boxes and make sure everything is in tidy order is a great relief.
Solicitors can help specifically with purchasing property when it comes to stamp duty, as they will help you to pay the correct amount on time.
Speak to a solicitor if you would like some advice.
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