Stamp duty can now impose an additional 3% tax on the purchase of second homes. This rule was introduced in the hope of discouraging buy-to-let investors from expanding their property portfolios. However, along with this introduction comes misunderstanding. The government offered clarification on certain scenarios whereby higher rates of stamp duty are not applicable.
The most likely situation in which stamp duty would not apply, is when a landlord who already owns multiple properties purchases an extra property to replace their main residence rather than for rent purposes. In this case, the concession will only apply if the landlord disposes of the first main residence and replaces one for the other, rather than adding to their portfolio of property investments.
Additional expenses can still be charged if your aim is to sell your property but the process has been delayed, leaving the ownership of two houses coinciding. One way to avoid this surtax is if you sell your former residence within 36 months of completing on the purchase, HMRC will refund the extra duty paid.
An unlikely exemption applies when if you are purchasing a property under the threshold of £40,000 a caravan, mobile home or houseboat. You can also avoid the extra tax if you buy an annexe capable of separate sale attached to a main residence. This will only apply if the annexe is no more than a third of the total transaction value.
Finally, if you are inheriting a share in a property that is equivalent to 50% or less in the three years prior to buying your new home, you will be excluded from paying a higher rate.
Dodging second home stamp duty
A clash has surfaced between the guidance provided by the government and the law, presenting a potential loop hole for couples wishing to purchase a second home without paying the surcharge of stamp duty. Tenants would have to live in the new property, but keep their former home as a buy to let investment, ultimately dodging the added stamp duty tax.
Suggestions from lawyers state that if a couple jointly owns a home, they may be able to alter their ownership arrangements in a way that avoids the surcharge that will apply on the additional purchase of a property. Although this imposes certain complexities, if it is successful, the likely beneficiaries would be that the couple can move into a larger home whilst retaining their former one.
Take this example in terms of a normal purchase of additional home, 3% stamp duty would be compulsory on the new purchase and could only be claimed when the former home is sold.
According to an article by the Telegraph, Experts state the room for manoeuvre stems from the definition of a “major interest” in a property, a key concept of the surcharge.
“The guidance issued by HM Revenue & Customs fails to take related property law into account. This has led to suggestions that homeowners could dodge the surcharge by giving away as little as 1% of their main property”.
Purchasing the house next door by ‘knocking through’
To gain extra space whilst minimising stamp duty, homeowners have taken to buying a neighbouring property and ‘knocking through’. Initially, this may leave you dumbfounded, however in specific situations this strategy can save buyers a considerable sum. Although, buyers still must pay stamp duty on the second property they purchase, it works out considerably less than if the same person were to relocate elsewhere.
Take a £4m apartment for example, if a buyer was to purchase the adjacent one at the same price they would pay stamp duty of £513,750. If the same person were to completely relocate to a property with the same amount of space as the two properties combined, they would avoid paying the added stamp duty, but would probably pay more in total because the standard stamp duty would be greater on the larger property – if the larger property cost £8m, they would pay £873,350.
Adjoining two properties into a coherent home is not always straightforward. Certain conservation rules, particularly in London, can prohibit such developments as rules are more restricted. Where two flats have been merged into one, owners may be faced with trouble reselling as it can be difficult to create rooms of sufficient volume to justify the double price tag relative to other flats in the same building.
Flipping property is a term used when referring to the purchase of a property and then sold off a short time after for substantially more, creating a profit due to works performed to strengthen its value.
Although, a loophole may have been discovered to avoid paying the heavy stamp duty bill. When purchasing off-plan property, an investor could sell the property off to another investor before the completion date. Stamp duty is only paid upon completion, therefore the original buyer avoids paying this tax, so any increase in value of the property is their gain.
Additionally, the original investor’s escape paying any kind of mortgage. Overall, mortgage offers are only valid for 6 months, therefore if the property is not yet complete you may need to reapply, flipping before the property completes is a way in which this can be avoided. If the market is strong, capital appreciation can provide soaring gains.
Putting this into practice, estate agent Kieran Chalker is infamous for gaining positive outcomes on the ‘flipping’ trend. Chalker and fellow investors purchased an off-plan property in the centre of London for £3,075,000 with a deposit of around £50,000 each, 10% of the sale price. This property was then sold before completion for £3.75 million, providing the group of six investors with £675,000 profit, less than their original £307,000 investment.
However, this process does present a high risk, as there is no guarantee you will sell at a profit. Although many investors can obtain lucrative amounts from flipping, it presents uncertainty. The property market can be unpredictable; therefore, it is important to assess the regeneration in the area which could lead to potential for capital growth as the market can change so quickly, leading to a fall in prices between the purchase time and when you want to sell.
RW Invest, a leading property investment company based in Liverpool, recognise the ambiguity surrounding stamp duty for first time buyers, the purchase of additional homes for both buy to let investors and buyers of single properties. To solve any queries, calculate stamp duty on property here: https://www.rw-invest.com/stamp-duty-calculator/. After major alterations in thresholds and percentages of stamp duty, keep connected with this calculator to relieve any doubt in the complex world of stamp duty.