SDLT: The Higher Rates for additional dwellings and the Main Residence exemption

The stamp duty land tax (SDLT) higher rates do not apply where a transaction is the replacement of an individual’s only or main residence. This briefing highlights some key concerns that arise in the application of the main residence exemption and an explanation of the application of the higher rates to individuals can be found here.

What is a main residence?

The SDLT provisions provide that a purchased property is a replacement of a purchaser’s only or main residence where they intend to use it as such. There is no definition of a main residence in the SDLT legislation and unlike capital gains tax it is not possible to nominate which property is a main residence.

Whether a property is intended to be a purchaser’s only or main residence or was a purchaser’s main residence is therefore a question of fact in each case. HMRC will consider evidence from a variety of sources including the length of time spent at the property, the address used for correspondence, where individuals are registered to vote and where the individual works in deciding whether a property was intended to be or was a purchaser’s main residence. Deciding whether a property is or is not a main residence therefore relies on a holistic assessment of the purchaser’s circumstances and intentions, with no single factor being determinative.

The three-year rule

A property is a replacement of a purchaser’s only or main residence where they intend to use it as such and where they have either:

1. disposed of another main residence within three years of the completion of the current purchase, or
2. dispose of their previous main residence three years after completion of their current purchase.

Importantly, where the purchaser still owns their previous main residence, they will be subject to the higher rates on the date of the current purchase. They will be able to reclaim these rates after the sale of their previous main residence if that sale takes place in the correct timeframe, and they submit their reclaim within one year of the disposal.

Problems arise in practice where purchasers may previously have used a property as their main residence but have not done so for some time. The requirement is that the previous main residence must have been the purchaser’s residence at some point in the three-year period ending with the completion of the purchase. Purchasers letting out a previous main residence may therefore be surprised that the higher rates applies to them and, where there is some flexibility, should consider whether they would be better served living in and not renting their previous main residence prior to purchasing a new home.

Timing

The wording of the legislation can lead to interesting results depending on the timing of a purchase. Individuals who do not own their own main residence but own a buy to let property will be subject to the higher rates on the acquisition of their main residence. This therefore penalises those who rent their own home and have one or more buy-to-let properties. These individuals cannot ‘replace’ a main residence within the meaning of these SDLT rules. 

By contrast, individuals who sell their main residence, purchase a buy-to-let and then purchase another main residence can be subject to the standard rates on both the purchase of the buy-to-let and the purchase of their main residence. Assuming they own no other residential property, their purchase of the buy-to-let will be standard rated because they own no other property and their purchase of the new main residence will be subject to the standard rates as a purchase of their main residence.

Manging the timing of transactions can therefore lead to very different SDLT results and purchasers looking to complete multiple transactions may therefore wish to manage their transactions to secure the most favourable SDLT treatment.

Spouses & Civil Partners

The exemption cannot apply if a spouse or civil partner retains an interest in the main residence sold or if the purchaser’s spouse or civil partner has acquired another property prior to the purchase with the intention of it being their only or main residence. Those married or in a civil partnership should therefore pay particular attention to these rules when considering the main residence exemption, even where their spouse is not a purchaser.

Although the provisions are modified for couples that are separating, each spouse cannot treat the purchase of a new residence as a replacement of main residence when they are each purchasing new homes. The main residence exemption can only apply to the first purchaser of a new home or where the family home was sold before either party purchased a new main residence. Those separating or divorcing should therefore take advice prior to making plans to purchase new properties if the application of the standard rates is material to their plans.

Conclusion

Although relevant to many everyday transactions the application of the main residence exemption can be complex. Careful consideration of the circumstances of the purchaser as well as a clear understanding of the limitations of the rules is essential in determining whether the higher rates will apply.

If you require further information about anything covered in this briefing, please contact Katjana Cleasby or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, April 2023