The Stamp Duty Land Tax 3% surcharge

The second big change to taxation for property investors is the imposition of an additional 3% SDLT charge on individuals acquiring a second dwelling, as from 1.4.2016.

A dwelling is defined as a building or part of a building that is used or suitable for use as a single dwelling, or is in the process of being constructed or adapted for use as a dwelling.

It therefore applies to a second home, a furnished holiday let, and to a residential buy-to-let. It also catches ancillary land and outbuildings (such as garages) that are occupied or enjoyed with a dwelling.

The same principle applies to partnerships, companies and trusts.

Property in a partnership is treated as owned by the individual partners so has to be taken into account when considering if the partner has more than dwelling. However, property used by the partnership for the purpose of trading (such as a house used by a dental practice) does not count as a second dwelling and should not trigger the charge. (NB, a ‘buy to let’ partnership is not a trade for these purposes)

The higher rate applies to a company even if it is the first or only purchase of a dwelling regardless of the individual shareholder or shareholders personal situation(s)  (except where it cost more than £500,000 and was acquired for owner occupation, in which case the 15% SDLT already chargeable is not increased).

However, an individual does not need to take into account his shareholding in a property owning company when considering if the surcharge applies to a purchase of dwelling in their own name.

If a trust is a ’Bare Trust’ or an ‘Interest in Possession Trust’ the higher rate charge applies to all other dwellings the beneficiary acquires an interest in.

A beneficiary of a ‘Discretionary Trust’ (who doesn’t have any specific interest in trust assets) does not need to take account of their trust interest if they purchase another property in their own name. However the trustees of a Discretionary Trust are liable to the 3% surcharge on all dwellings purchased as trust property, including the first and/or only such property (this treatment is similar to the company rules).

Married couples and civil partners who are living together are treated as ‘a single unit’ for the purposes of the higher rates. So if one half of a couple already owns a residential property in their own name, the purchase of a home in the sole name of the other partner will be subject to the surcharge.

However, if a couple separate in circumstances that are likely to be permanent, they are no longer treated as a unit and can each purchase a main residence without triggering the higher rate (assuming they have no other interests in residential property).

The surcharge also applies to a joint purchase by two or more individuals, where any one of them already owns or has an ‘interest’ in a residential property (and isn’t simply replacing their only or main residence).

The ‘interests’ taken into account can include trust interests, no matter how insignificant that trust interest may be.



A beneficiary has a right to 5% of the income from a trust which owns a holiday let generating £10,000 profit per annum. The beneficiary receives £500 income per annum from the trust. She acquires a holiday let with 2 other investors, paying £750,000, and her trust interest increases the SDLT payable by £22,500 (or at a cost of 45 years trust income!).

It may therefore be necessary to review and update family trusts and other interests in residential properties if the interest is likely to have a disproportionate effect on new acquisitions.


Exemptions from the charge

The 3% surcharge does not apply in the following circumstances:

- non-residential (e.g, office space, a B&B, a factory, or a hotel)

- mixed use properties such as a shop with a flat above;

- where the chargeable consideration is less than £40,000;

- when the dwelling is subject to a lease which has more than 21 years to run on the date of purchase;

- caravans, mobile homes and houseboats

- to a leasehold interest originally granted for a period 7 years or less (e.g, a leasehold originally granted for 100 years with only 5 years left to run is chargeable at the higher rate, but a leasehold  originally granted for 7 years with 6 years 11 months to run is not subject to the higher rate)


It could therefore be worth considering property investments in these categories, provided you have the expertise and desire to do so, and the profitability is likely to be comparable, and the tax saving is significant enough to warrant a change in your business model.


Main residence

Even though an individual may own several buy-to-let properties, the 3% surcharge is not due if he/she simply replaces their own main residence, provided the new residence is acquired after the previous main residence has been disposed of, and within 3 years of disposal.


-  the charge will still apply if the old residence is retained – for example, if it is subsequently let out (because in that case it hasn’t been disposed of)

-  if an individual owns a buy to let, but no main residence, then subsequently acquires a main residence he will incur the surcharge (so the first time buyer of a main residence is worse off than someone who replaces their main residence!)

Finally, if the purchaser buys a new main residence before disposing of the old main residence, but disposes of the old residence within 3 years of acquiring the new property he will have to pay the 3% surcharge in the first instance, but can reclaim it from HMRC when the disposal completes.


Inherited Property

Inherited interests in property are generally taken into account when determining if a surcharge is due, but there is an exception where the inherited interest is 50% or less in the property, which allows the beneficiary to ignore the inherited interest for a period of up to 3 years after inheritance, or until a share exceeding 50% is acquired by the beneficiary within the 3 year period.


Multiple Dwellings Relief

If you buy more than one dwelling in one transaction, Multiple Dwellings Relief ‘(MDR) continues to be available.

MDR works by computing the mean average price of the dwellings, then calculating the SDLT due on that price and then multiplying that figure by the number of dwellings; however, if the mean average price would otherwise be charged at 0%, a minimum rate of 1% applies to the overall purchase price.

In addition, the surcharge always applies where 2-5 dwelling are purchased if 2 or more of those dwellings are worth more than £40k (valued on a just and reasonable basis) and are not subject to a lease with more than 21 years to run, so the minimum rate of SDLT where MDR is claimed will therefore be 4%.

By contrast, a purchase of 6 or more dwellings is charged at the non-residential rates (so there is no surcharge), unless MDR is claimed.

There are therefore various SDLT consequences and options when purchasing one or more dwellings in one transaction or a 'linked' transaction:

a) You can pay SDLT on the combined price at residential rates (+3%),


b) You can claim Multiple dwellings relief (MDR) which allows you to pay SDLT at the residential rates (+3%) that are applicable to the average price of one of the dwellings and then multiply the end result by the number of dwellings to arrive at total SDLT payable,


c) If 6 or more dwellings are purchased, the default position is that SDLT is charged at the non-residential rates, unless MDR is claimed.

There is no hard and fast rule determining which option to take, because the circumstances and outcome will be different in every instance, but the difference in tax payable can be very significant.



A landlord buys 6 houses in one transaction at a cost of £2.4m to add to his existing portfolio. SDLT using each option works out as follows:

a) £273,750

b) £132,000

c) £109,500

 Clearly most people would prefer option c), but it is necessary to perform calculations to determine which option is best for any specific transaction.

Taking advice is essential!


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