In the first of two articles on SDLT, we consider the higher rates that now apply on the purchase of second homes by individuals and on all residential purchases by companies.

Higher rates of Stamp Duty Land Tax (SDLT) on the purchase of ‘additional residential properties’ by individuals (think second homes and buy-to-lets) and for all residential purchases by companies were introduced on 1 April 2016. The higher rates are commonly referred to as the ‘3% surcharge’, since the SDLT rate for each band is increased by 3%, creating a top rate of 15% for consideration above £1.5 million.

The replacement of a main residence is excluded, allowing the owner of a residential property portfolio to pay at standard rates when moving home. The purchase of the reversion to a lease that still has more than 21 years to run is also excluded from the higher rates.

While the application of higher rates will be straightforward in many transactions, here is a selection of the more interesting real-life queries we have faced.

A client is buying a bigger home and is considering keeping their old home and renting it out.

This common scenario will trigger the higher rates on the purchase of the new home. Although the client is changing their main residence, the exception from higher rates only applies if the previous main residence is actually disposed of. In this scenario, the client will end up owning two properties but will not have ‘replaced’ their main residence. The caveat to this is that if the client subsequently changes their mind and sells their old home within three years, they may be able to claim a refund at that point.

Parents, who own their own home, are helping their child fund the purchase of the child’s first home.

Even though this will be the child’s only residential property, higher rates will be payable if anyone acquiring an interest in the property already owns another residential property. A gifted deposit from the parents will therefore not trigger higher rates, nor will a true loan. But if the parents are essentially buying a share of the property (even if their names won’t appear on the title), then higher rates will apply to the whole purchase price, not just their share.

A client is buying a new home. They also retain an interest in their previous home with their former spouse, which their divorce settlement prevents them from selling within five years.

Although the client will own a major interest in more than one residential property, and this is not the replacement of a main residence, the higher rates may not apply. Since 22 November 2017, property held subject to a ‘property adjustment order’ is disregarded in certain circumstances. Further investigation would be required to determine whether the conditions are met.

Two individuals wish to purchase a residential property. Because one of them already owns another property, they propose buying in the name of the other, who will hold the property on trust for them both.

The higher rates will apply. SDLT divides trusts into ‘settlements’ and ‘bare trusts’, and this would be a bare trust for SDLT purposes. SDLT looks through bare trusts and treats them as a purchase by the benefi cial owners. Because one of the benefi cial owners already owns another residential property, higher rates would apply to the whole purchase price. Most settlements are treated like companies, so that higher rates will generally apply on all residential purchases.

A non-domiciled client has no main residence, and is extending their global network of ‘pied a terre’ residences by buying their fi rst UK property.

The higher rates apply if the buyer holds a major interest in another residential property anywhere in the world. The fact that this is the client’s fi rst UK property is irrelevant, as is his non-domiciled status. The key question is whether he holds suffi cient interest in any of the other residences. If he owns even one of the other properties, that will be suffi cient to trigger higher rates on the UK purchase. And, since the client has no existing main residence and does not intend the UK property to be their main or only residence, the exception for the replacement of a main residence will not assist.

A client is transferring a mortgaged property from their sole name into joint names with their spouse, who owns other residential property.

Even though there is often no money passing on a transfer between spouses, the assumption of mortgage debt by the incoming spouse is chargeable consideration subject to SDLT. When higher rates were fi rst introduced, they applied to transfers between spouses in the same way as any other transaction. However, since 22 November 2017, the higher rates do not apply to transfers solely between spouses and civil partners, provided they are living together.

A client paid higher rates on the purchase of a property in their sole name, because their spouse owned the marital home. If they divorce within three years and the client moves into what is now their only property, can they claim a refund?

Unfortunately not. The higher rates legislation looks at whether people are married and living together at the time of purchase. There is no provision allowing the position to be revisited if the parties subsequently separate. A refund can sometimes be claimed within three years under the ‘replacement of main residence’ rules, but that is unlikely to apply, since the buyer’s intention to use the property purchased as their main or only residence is judged at the date of purchase, rather than in light of subsequent events.

An earlier version of this article appeared in Estates Gazette.