Ritika Janiya
If you’re planning to buy a second home or a rental property, it’s essential to know about new stamp duty rules. In a recent budget, Chancellor Rachel Reeves increased the stamp duty surcharge on additional properties from 3% to 5%. This means if you already own a home and buy another, you’ll pay a 5% extra charge on top of standard rates. So, how can buyers handle this tax hike and reduce their costs? Here’s a simple guide to help you save on stamp duty and maybe even avoid some extra charges.
What Is the Second Home Surcharge?
Stamp duty is a tax you pay when you buy a property, and it gets higher if it’s not your main home. The new rules mean that if you buy an extra property, the added 5% surcharge will apply. For example, if you buy a second home for £275,000, you’ll pay a standard stamp duty plus an extra 5% on that amount.
In England and Northern Ireland, the rates differ based on the property price. If your second home costs between £250,001 and £925,000, the rate goes up to 10% due to the surcharge. These changes mean higher taxes for second home buyers, especially with price rises scheduled for April 1, 2025, when earlier relief measures end. However, there are a few strategies to reduce these costs or even avoid them altogether.
7 Clever Ways to Reduce Stamp Duty on Second Homes
1. Choose a Mixed-Use Property
Some properties have both residential and non-residential parts, like a flat above a shop or farmland with a house. Such properties are taxed differently. They qualify for “non-residential” rates, which means you may avoid the 5% surcharge. Mixed-use properties are also tax-free up to £150,000, after which rates start at just 2%. So, consider properties that offer this special status and avoid the higher residential rates.
2. Buy a Property That’s ‘Uninhabitable’
A property deemed “uninhabitable” due to damage like severe mold, leaks, or structural issues can qualify for lower rates. These homes skip the 5% surcharge, so the maximum rate remains at 5% if you’re spending more than £250,000. HMRC assesses the property’s condition to see if it meets “uninhabitable” status. Minor fixes like a new boiler or carpeting won’t count, so look for serious issues if this is the route you want to take.
3. Buy a Commercial Property and Convert It Later
You can also buy a commercial property, such as an office or shop, and convert it into a home later. Commercial properties qualify for cheaper stamp duty rates, with no 5% surcharge applied. If you decide to convert, you may even get VAT discounts on materials and labor costs at a reduced 5% rate, making it a cost-effective option for savvy buyers.
4. Negotiate the Price of Furniture
If the property comes with extra items like curtains or appliances, these are called “chattels” and can sometimes inflate the price of the property, impacting stamp duty. To save money, negotiate with the seller to separate these items from the sale price. This way, you can buy these items directly from the seller without including them in the property price, potentially lowering your stamp duty bill.
5. Sell Your Main Residence Within Three Years
Buying a second home while still owning your main home incurs the 5% surcharge. However, if you sell your primary residence within three years, you can claim a refund on this additional tax. You’ll need to request the refund within 12 months of selling your home, or from the date you file the stamp duty return for the new one. This tip is particularly helpful for those wanting a new primary residence without the extra tax burden.
6. Negotiate the Purchase Price
If you manage to reduce the sale price of your new property, it can impact the stamp duty you owe. For instance, if you’re buying a home just above the £925,000 threshold, the surcharge rate goes up. Lowering the price can keep you in a lower bracket and reduce your overall costs. Remember, homes below £40,000 have no surcharge, although it’s rare to find a property at that price.
7. Consider Mobile Homes and Houseboats
Certain homes, like mobile homes, caravans, and houseboats, are exempt from the 5% surcharge. They also don’t incur standard stamp duty fees, making them an affordable option for people looking for a second dwelling without the tax headache. If you’re after something unique or a more flexible home, this might be the route for you.
Stamp Duty FAQs for Second Homes
Can You Avoid It by Buying Multiple Properties?
Not anymore. Before June 2024, buying six or more homes at once could help you dodge the extra 5% charge. But this rule has changed, and buying multiple homes now comes with the surcharge.
Does the Surcharge Impact Companies?
Yes, it does. Buying a second home through a limited company won’t sidestep the tax. Even companies must pay the 5% surcharge on additional properties.
Does the Surcharge Affect First-Time Buyers?
No, first-time buyers don’t have to pay the surcharge if the property will be their primary home. But if they’re buying a property to rent out or use as a holiday home, the extra charge applies, and they won’t qualify for first-time buyer relief.
What About Transfers Within Families?
If you’re transferring ownership of a property to a spouse, the surcharge may not apply, as long as no other parties are involved. However, if you’re increasing your share in an existing second home, you won’t pay higher rates if you already own at least 25% of it.
Buying a House for a Child?
If you buy a home for your child but keep it in their name, they won’t incur the surcharge. Acting as a guarantor keeps your name off the deeds and avoids the extra stamp duty charge, but you’ll need to cover mortgage payments if your child defaults.
