Stamp Duty on Second Homes and Buy-To-Lets

When it comes to making substantial purchases such as property, including second homes and buy-to-lets, a vital consideration that should be made is how much stamp duty will be applied, as this will significantly impact your overall budget. Since 2020, there have been numerous changes to stamp duty announced by the government in response to the Coronavirus pandemic, so it’s important to be aware of which rates will apply to your purchase.

What is stamp duty?

Stamp duty land tax, or simply ‘stamp duty’ for short, is a tax that is due to be paid when you buy property. This tax is applicable on purchases of residential property, commercial property, and land, but only where the value of the property is more than £40,000. Smaller properties such as car garages can therefore potentially be bought without attracting stamp duty. How much stamp duty you will need to pay on your second home or investment property is dependent on the value of the property and which rate bands it falls into.

What are the stamp duty rates on second homes?

A stamp duty holiday was made available during 8 July 2020 until 30 June 2021. If your purchase completed between these dates then the stamp duty rates on a second property would be:

• 3% up to £500,000
• 8% between £500,001 to £925,000
• 13% between £925,001 to £1,500,000
• 15% from £1,500,001 and upwards

For purchases after this date from 1 July 2021 to 30 September 2021, new temporary rates are in place:

• 3% between £40,001 to £250,000
• 8% between £250,001 to £925,000
• 13% between £925,001 to £1.5 million
• 15% on any amount exceeding £1.5 million

From 1 October 2021 to 30 October 2024, the stamp duty rates for second and additional property purchases will return to the original rates before Covid:

• 3% between £40,001 to £125,000
• 5% between £125,001 to £250,000
• 8% between £250,001 to £925,000
• 13% between £925,001 to £1.5 million
• 15% on any amount exceeding £1.5 million

From 31 October 2024 to 31 March 2025, the stamp duty rates for second and additional property purchases will increase:

• 5% on transactions between £40,000 – £250,000
• 10% between £250,001 to £925,000
• 15% between £925,001 to £1.5 million
• 17% of any amount exceeding £1.5 million

From 1 April 2025 the stamp duty rates for second and additional property purchases will be as follows:

• 5% on transactions between £40,000 – £125,000
• 7% between £125,001 to £250,000
• 10% between £250,001 to £925,000
• 15% between £925,001 to £1.5 million
• 17% on any amount exceeding £1.5 million

How to calculate stamp duty on a second home

To calculate what your total stamp duty liability will be, you do not apply the percentage rate to the entire cost but per portion to the relevant band. An example of how to calculate stamp duty on a second property:

You invest in a buy-to-let which costs £350,000 and complete the purchase on 31 July 2021. You would pay 3% on the first portion of £250,000 which is £7,500. The remaining portion of £100,000 would be calculated at the next rate of 8% which is £8,000. Therefore, the total stamp duty to be paid is £15,500.

When does the stamp duty rates for second homes apply?

It is important to note that these stamp duty rates only apply to second and additional properties. In fact, the stamp duty applicable for additional properties is a 3% surcharge on top of the standard rate which is only available to first time buyers. Not only do first time buyers benefit from lower rates, they also do not have to pay any stamp duty at all if their purchase of their first property is no more than £300,000.

However, this rule is determined by ownership rather than purchase. This means that even where you are buying your first property, you may not be able to take advantage of the standard rate or stamp duty relief. This can happen where you already own property that you have not purchased, such as when you inherit property or are added onto the deeds of a property. Regardless of whether you own the freehold of a property, leasehold or shared ownership; any one of these statuses will mean that you will have to pay the stamp duty rates for second properties.

When do I not need to pay higher stamp duty rates on a second property?

There are some exceptions where the higher rate stamp duty does not apply to the acquisition of second homes including:

• Inherited property. If you already own property and receive a second through inheritance, you do not have to pay stamp duty but you may be liable to pay inheritance tax.
• Property received as a gift. Stamp duty only applies on ‘chargeable consideration’ so if you receive a second property as an outright gift then you will not be liable to pay stamp duty.
• Replacing your main residence. If you already own more than one property but are buying a new home that will become your main residence, then you may not have to pay the higher rates so long as you have disposed of your original main residence first. Where the sale or gift of your original main residence occurs after the purchase of your new property, then you may be able to reclaim any stamp duty payments. Bear in mind that the sale or gift of an asset may incur capital gains tax.
• Purchase of ‘homes of a semi-permanent nature’ such as boathouses, caravans, holiday or static homes and other temporary dwellings considered as ‘movable property‘ do not incur stamp duty .

How does joint ownership affect stamp duty on a second home?

If you are buying a property with another person, but one of you already owns property, it is still possible to avoid paying the additional stamp duty rate so long as the person with no property ownership is the sole name on the title deeds. This will not apply however for those who are a married couple or in a civil partnership as you are automatically treated as joint buyers.

Conversely however, if you are separated from your spouse or civil partner, and they purchase a second home in which they are liable to pay the additional stamp duty, you will not be automatically treated as joint buyers. You therefore have no liability to pay any of the stamp duty on their purchase and will be treated separately.

Where you are separating or getting divorced and you are buying a new house to live in as your main residence, you could still have to pay the higher stamp duty rates if you are retaining a share in your existing home which is worth more than £40,000. To avoid this, you may want to consider selling your share to your former partner, or you may both decide to sell the entire property.

Reclaiming stamp duty on a second property

Getting timings aligned when you are buying and selling property can be difficult. If you are in the position where you will buy a new home before disposing of your main residence first, then you will have to pay the higher stamp duty rates on additional properties. However, the surcharge (3% unless the property is no more than £300,000) can be reclaimed from HMRC so long as you sell your original main residence within 36 months of completing the purchase of your second home.

Other taxes to consider on second properties

Whilst stamp duty is the only one-off tax you need to pay at the time of purchasing your second home or buy-to-let, you should consider that there may be other taxes you could be liable for. Council tax is an ongoing tax that needs to be paid on most residential properties throughout your ownership. How much is dependent on where your property is located and how much its value was on 1 April 1991. You can find out how much council tax will be on a property by visiting your local council website. Remember, council tax charges often increase each year. If your second home is empty, you may be able to receive a discount on council tax but this is as the discretion of your local council. Other local councils will instead charge you double if the property is empty for over 2 years.

If you have purchased an additional property as a buy-to-let then your tenants may be liable to pay the council tax instead of you, however you will need to pay income tax on any rental income generated. To do this you will need to complete a self-assessment tax return for each year you earn rental income. How much income tax you will need to pay will be dependent on what income tax band you fall into. You will need to consider you entire income to determine this, so do not forget to include any income you receive from employment or self-employment as well.

In the future, if you dispose of your property, either by way of sale or gift, you may be liable to capital gains tax (CGT) where the value of your property increases. If you sell property after 6 April 2020, you must report and pay any CGT due within 30 days of selling it. To do this, you will need to complete a self-assessment tax return also. You may find it helpful to read our article on ways to reduce CGT.