How to Avoid Stamp Duty on Second Home

Buying a second home will usually mean paying the higher rates of Stamp Duty Land Tax (SDLT), which adds thousands of pounds to your purchase costs. However, the higher rates do not apply in every situation. If you are replacing your main residence, for example, you may be able to avoid the higher rates or reclaim them after selling your previous home.

This guide explains when the higher rates apply, how much second-home stamp duty could cost, the legitimate ways you may avoid or reclaim the higher rates, how the refund process works and what to check before you buy.

How can I avoid stamp duty on a second property?

There is no general loophole that allows you to buy a second home without paying SDLT. Instead, whether you pay the higher rates depends on your property ownership and circumstances at the time of purchase.

The most common ways you may avoid or reclaim the higher rates include:

• Selling your previous main residence before or on the same day as buying your new home.
• Buying your new home first and claiming a refund after selling your previous main residence.
• Buying a property or property interest that is excluded from the higher-rate rules.
• In some circumstances, structuring a purchase so that someone helping with the mortgage does not acquire a beneficial interest in the property.

To avoid the second home stamp duty, you can exclude anyone with an interest from the legal title, use a joint mortgage sole proprietor mortgage, transfer from a partnership to a limited company or purchase for less than £40,000.

Exclude anyone from the legal title who owns an interest in another property

If you are buying a property with someone who already owns another residential property, putting both names on the legal title can affect whether the higher rates of SDLT apply. For joint purchasers, the higher rates may apply to the entire transaction if any purchaser would be liable for them.

If you are married, it doesn't matter whose name is on the title. As long as you or your spouse owns an interest in another property, the additional rate is applicable - SDLT - higher rates for additional dwellings: purchasers with a spouse or civil partner.

However, HMRC says that a person who is named as a legal owner but has absolutely no beneficial interest may not be treated as a joint purchaser for the higher-rate rules. This must be evidenced in writing. If that person is entitled to a share of the sale proceeds, rental income or occupation of the property, they are likely to have a beneficial interest.

Joint Mortgage Sole Proprietor mortgage

You will be named on the mortgage but not the legal title, allowing you to avoid paying stamp duty on second homes. This allows you to help your child, for example, purchase a property.

This is not something to treat as a simple SDLT loophole. The legal and tax position depends on the actual arrangement, including who owns the property, who benefits from it and what rights the non-owner has. If you are considering a JBSP arrangement or lending money towards someone else's purchase, get the structure checked before proceeding.

Transfer the property from a partnership to a limited company

If your property is part of a partnership, you can transfer it to a limited company without having to pay stamp duty on a second home. We explain this further in our article - How do I transfer a partnership to a limited company with no SDLT?

However, it is important to note that companies can actually be subject to the 5% higher-rate surcharge when buying residential property. Also, a separate 17% SDLT rate can also apply to corporate bodies buying residential properties costing over £500,000, although specific reliefs and exclusions can apply.

Buy a property for under £40,000

Stamp duty higher rates only apply to properties £40,000 and over. The challenge is that if your intention is to have an interest in the property and you already own another property, the second-home stamp duty applies. You can, however, draft a loan agreement to protect your investment, which isn't considered an interest in the property and as such doesn't attract the additional rate of stamp duty.

If your intention is to have a benefit/interest from the property, then there is no way to avoid second home stamp duty if you own another property and have no intention of selling it to make the new property your main residence.

Which second homes are exempt from stamp duty?

You can avoid paying stamp duty on second homes if your property is:

• worth less than £40,000
• easy to move around (i.e. boats or caravans)
• a combination of residential and non-residential (building with upstairs flat and shop on the ground floor)
• falls within certain leasehold exclusions

How much is stamp duty on a second home?

The higher rates of Stamp Duty Land Tax (SDLT) are currently 5 percentage points above the standard residential rates. The amount you pay depends on the purchase price and the SDLT rates that apply to each portion of the property value.

For example, an additional residential property bought for £300,000 is currently subject to SDLT at 5% on the first £125,000, 7% on the next £125,000 and 10% on the remaining £50,000, giving a total SDLT bill of £20,000.

Second home stamp duty calculator

Use our stamp duty calculator to estimate how much SDLT you could pay based on your purchase price and circumstances.

How to avoid stamp duty on a second home with a loan?

A genuine loan secured against a property is different from owning a beneficial interest in that property. For SDLT purposes, a security interest is treated as an exempt interest. Section 48 of the Finance Act 2003 defines a security interest as an interest or right held to secure payment of money or the performance of an obligation.

However, the law also lays out that the arrangement needs to be a genuine loan, and you cannot simply label an ownership arrangement as a loan.

When do you pay Stamp Duty Land Tax?

If any party acquires an interest or a greater interest in land, stamp duty land tax (SDLT) or land transaction tax (LTT) will be payable by reference to any chargeable consideration given for it. Chargeable consideration is defined in the Finance Act 2003, Schedule 4, Stamp duty land tax: chargeable consideration and confirmed by HMRC with examples.

Your SDLT return generally needs to be sent to HMRC and the SDLT paid within 14 days of the effective date of the transaction. For most straightforward property purchases, the effective date is completion.

Your conveyancer will normally deal with the SDLT return and payment as part of the conveyancing process. This means you should establish your likely SDLT liability before completion, particularly if you are buying an additional property and need to budget for the higher rates.

Can you claim back stamp duty on second home?

If any of the parties purchasing a property own an interest in any other property around the world, then the higher rates of SDLT are payable. However, if you sell your previous main residence within 36 months of buying your new home, you may be able to claim a refund of the higher-rate element. For properties sold on or after 29 October 2018, HMRC must receive the refund claim by the later of 12 months after the sale or 12 months after the SDLT return for the new home is filed.

If you are forced to pay it, however, once you sell the previous main residence, you can claim a second home stamp duty refund.

Need help with Stamp Duty on a second home?

Our conveyancing specialists can help you understand your Stamp Duty position, including whether you could avoid or reclaim the higher rates.