Main residence sold within 3 years of buying second property - Stamp Duty surcharge refund

Main residence sold within 3 years of buying second property - Stamp Duty surcharge refund

The stamp duty land tax has higher rates that are intended to target purchases of extra residential properties, such as second homes and rental properties. However, the implementation of the surcharge is more complex than anticipated. One of the most challenging aspects is the exemption from the 3% surcharge for transactions that involve the replacement of the buyer's primary or only residence and the accompanying three-year conditions.

This exemption provides an opportunity for buyers to avoid paying the surcharge in certain circumstances, even if they own additional properties or a collection of properties.

Retrieval of the SDLT surcharge in cases where the old property is sold after the purchase of the new one

In this scenario, a person sells their previous home (which was their only or main residence) after buying a new home with the intention of making it their only or main residence. The buyer may also own other properties.

On the day of the transaction for the new home, the buyer will own two or more properties (at least their old home and the new home), making them liable for the 3% SDLT surcharge. The question arises as to whether the surcharge can be recouped if the old home is later sold.

This situation is subject to the three-year rules that have been in effect since the introduction of the 3% surcharge on April 1, 2016. The legal requirements for reclaiming the surcharge can be summarised as follows:

• (a)  On the completion of the purchase of the new home the buyer intends to live in the new home as the buyer’s only or main residence.
• (b)  Within the next three years the buyer (or their spouse or civil partner) sells or otherwise disposes of the old home.  For purchases completing on or after 22 November 2017 changes mean that following that sale or disposal neither the buyer nor their spouse or civil partner can retain the old home nor any share in it.
• (c)  At any time within the three years leading up to the purchase of the new home, the buyer lived in the old home as the buyer’s only or main residence.

So there always have been two distinct three year tests to contend with where the old property is sold after the new one is bought:

• sale of the old home within the three years following purchase of the new home and
• residence in the old home within the three years before the purchase of the new home

The three-year SDLT rules are now in effect if the old home is sold simultaneously or prior to the new home.

In this scenario, a person sells their old home either simultaneously with or before purchasing a new home, but they own other properties that may result in the 3% surcharge being due.

This is a confusing area but can lead to unexpected savings for buyers. For purchases completed after November 26, 2018, there are two three-year tests, similar to those in place for the recovery of the surcharge described above.

If a buyer completed a purchase by November 26, 2018, they would escape the surcharge if they met the following conditions (paraphrased from the legislation):

1. (a) Upon completion of the purchase of the new home, the buyer intended to live in the new home as the only or main residence.
2. (b) In a transaction on the same date or earlier than the purchase of the new home, the buyer (or their spouse or civil partner at the time) disposed of a significant interest in another dwelling (referred to as the "sold dwelling")
3. (ba) Immediately after that disposal, neither the buyer nor the buyer's spouse or civil partner retained a significant interest in the sold dwelling (added for purchases completed on or after November 22, 2017).
4. (c) At any time before completion of the purchase of the new home, the buyer lived in the sold dwelling as the only or main residence.
5. (d) At no time after the disposal of the sold dwelling has the buyer (or the buyer's spouse or civil partner) acquired a significant interest in any dwelling with the intention of living in it as the only or main residence.

The sold dwelling could be located anywhere in the world.

This means that even the sale of a previous main residence years ago could have qualified for the replacement of only or main residence exception, as long as the purchase of the new home was completed by November 26, 2018.

For purchases completed after November 26, 2018, conditions (b) and (c) are strengthened by adding three-year rules. To meet condition (b), the disposal of the old home must have been completed within three years prior to the purchase of the new home. To meet condition (c), the taxpayer must have lived in the old home as the only or main residence at some point within the three years leading up to the purchase of the new home.

SDLT 3% rebate only for individuals

The replacement of only or main residence exception is only applicable for individual purchases and does not apply to purchases made by companies, housing associations, or institutions such as universities. Additionally, discretionary trusts, even if used to replace a home for one of its beneficiaries, cannot take advantage of this exception.

For other trusts, such as those with a beneficiary who has a life interest or right to income, the circumstances of the beneficiary will be evaluated to determine if the surcharge is applicable. For example, a trust with a beneficiary who has a life interest may be able to replace the home of the beneficiary by selling and purchasing a new one without incurring the surcharge, even if the trust or beneficiary owns other properties.

It's important to keep in mind that for those with spouses or civil partners, their partner is considered as a co-buyer of the property, even if they are not listed as such. When evaluating the surcharge for joint buyers, each buyer is treated as a sole buyer, and if the surcharge would apply to any of the buyers, it applies to the entire purchase.