The proposed 3% higher rate of SDLT on additional residential properties will come into effect from 1 April 2016.

The additional rate is intended to apply, if, at the end of the day of the transaction, an individual has a major interest in two or more residential properties and has not replaced their main residence.  A major interest can include a lease of over seven years.  Companies will generally be subject to the higher rate on their first purchase of residential property.

However, there are various exemptions from the additional rate available. For example:

  • where the additional property is purchased for chargeable consideration of less than £40,000 the additional rate will not apply;   
  • where purchasers who own more than one property dispose of their main residence, they will not be subject to the higher rates of SDLT if they purchase a replacement main residence within 3 years;
  • where purchasers buy a new main residence before disposing of their previous one, they will be able to reclaim additional SDLT paid on the purchase of the replacement property provided they dispose of their old property (assuming it was their main residence) within 3 years.   

A consultation undertaken this year has resulted in some changes to the details of the exemptions originally proposed.  Key changes are summarised below.

Major changes from consultation proposals

  • Extension to replacement period: The period in which a person must either replace their main residence if they already own more than one property or dispose of their previous main residence when they have already purchased a replacement in order to avoid the 3% additional rate has been extended from 18 months to 36 months.
  • Exemption for large scale investors: The consultation proposed an exemption from the additional rate for large scale investors, which could have applied, for example, to persons with an existing portfolio of at least 15 properties. This has not been implemented so the additional rate will apply equally to large developers.
  • Married couples living separately: In general, married couples will be treated as one unit for the purposes of the additional rate SDLT. This means that, for example, if the husband owns a property and his wife then purchases a property in her own name, the wife will (subject to exemptions applying) be liable for the additional rate SDLT. As a result of the consultation, an exemption has been introduced for married couples living separately in circumstances where this is likely to become permanent.  
  • Inherited share in a property: Where a person inherits a small share, being 50% or less, in a single property and that person purchases a second property within three years of the inheritance, this second property will not generally be counted as an additional property so the additional rate will not apply.

Summary

While it will often be clear whether or not the additional rate applies, not all cases will be straightforward.  This could particularly be the case where, for example, mixed use property is involved; where the purchasers have more than one property which they consider to be their main residence; or if property is held in trust. The purchaser will need to check the detail of any exemption he is intending to rely upon carefully.