Stamp duty changes: the effect on second home owners, landlords and the rental market

On 1 April 2016 a new higher rate of stamp duty was introduced for second homes. The change to the duty – formally called Stamp Duty Land Tax, or SDLT – led to a rush to complete transactions, and given that the deadline coincided with the Easter weekend, there were some long days for conveyancers – and some anxious waiting for their house-purchasing clients. But there is now evidence that the new higher rate of SDLT has had a profound effect on the property market.

Potential investors in buy-to-let properties had their plans affected. So too did people who wanted to retain and let an existing property on an Assured Shorthold Tenancy, while purchasing another property as their main residence. The increase in SDLT has also been very expensive for buyers generally. A case in point was a recent instruction I received where the SDLT came to almost £10,000, which caused the purchase of the second property to fall through, and the first property did not come to the rental market.

There has been a marked decrease in the number of properties coming onto the rental market, leading to a shortage of rental property throughout the country. This may be because the higher rate is only one of many recent changes that landlords have had to contend with: there have also been adjustments to tax relief on mortgages, new compulsory training courses, regulations about the condition of the property, requirements to test for such hazards as legionella, smoke and carbon monoxide, and also the need for certificates for gas and electrical safety and the testing of portable appliances.

As well as the increase in duty, there were changes to the SDLT rules, which many property purchasers have found a bitter pill to swallow. For example, a husband and wife or a couple in a civil partnership are deemed to be a ‘single entity’. So if a man owns a property in his sole name, and his wife or civil partner buys a property in her sole name, it is deemed to be a second property, even though she is not a joint owner of any other property. The rule does not apply to people who are simply living together, and who are not married or in a civil partnership. To those that are, this seems unfair.

There has also been confusion as to what “replacement of a main residence” means. To avoid the higher rate SDLT you must replace your main residence by selling the existing one. I have come across more than one instance where advisers have interpreted this as simply moving to a new main residence. But if the purchase and sale are not simultaneous, the higher rate applies. There is a way around it, however: if the first property is sold within 3 years of the purchase of the new one, the purchaser can apply for a refund of the additional SDLT (provided that the refund is applied for within 3 months of the sale of the first property).

There is no doubt that the higher rate SDLT and the exemptions and rules surrounding it are a challenge to all. It is essential for purchasers to seek legal advice before firming up plans to purchase.

Melanie James