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A landlord’s guide to stamp duty

Buying a second home can be an exciting investment, but there’s a lot more to think about than the rental income you’ll generate.

stamp duty

As well as your obligations towards tenants, there are financial costs that you might not expect, such as second home stamp duty. 

Many people don’t realise that the stamp duty on a buy to let property or second home is paid at a higher rate than that paid by owner/occupiers, so read our guide to find out more.

What is stamp duty? 

Stamp duty land tax (SDLT), to give it its full name, is a tax that home buyers must pay when purchasing a property above a certain price in England and Northern Ireland. Different taxes apply in Scotland and Wales and are outlined below. In 2019-20, the SDLT threshold is £125,000 for residential properties and £150,000 for non-residential land and properties.

Chartered conveyancing lawyer Sian Turvey, head of Robertsons Solicitors’ specialist property department, said: “Stamp duty is payable if you buy a residential property or land over £125,000. Different rates apply for non-residential and mixed use land, and the tax is payable upon completion of your purchase. 

“Normally, an additional three percent on top of the standard SDLT rate is payable if purchasing a new property results in you owning more than one.” This is the landlord’s stamp duty rate that you’ll need to factor into your buy to let purchase.

How much is stamp duty?

Stamp duty rates are tiered, depending on the price of the house you buy and whether it’s your only property or a second home. For houses bought for up to £125,000, you will pay no stamp duty if it’s your only home. If it’s a second home or a rental property bought for between £40,000 and £125,000, the SDLT will be 3% of the purchase price.

For homes in the £125,001 to £250,000 price bracket, standard stamp duty is charged at 2% of the amount over £125,000 and at 5% for an additional property.

The next band is for homes priced between £250,001 and £925,000, in which standard SDLT is 5% of the sum over £125,000 and 8% for an additional home, while the highest bracket is for homes costing more than £1.5m. 

Why was second home stamp duty introduced?

Sam Hurst of property listings agency Open Rent said: “The second home stamp duty surcharge was announced in the 2015 Budget and came into force in 2016. First-time buyers were finding it hard to buy a home, and increasing the tax for people buying a second home was aimed at giving first-time buyers an advantage. Obviously, first-time  buyers are still finding it hard to buy four years later, despite the policy.” 

What impact has this had on landlords?

“Stamp duty is only paid at the point of purchase, so landlords who already bought their properties before 2016 will have felt no difference, while landlords looking to expand their portfolios since then will have faced higher acquisition costs,” said Mr Hurst. 

“A raft of measures has been introduced to cool down the buy to let market, so it's impossible to say how much effect this one policy has had. However, the number of buy to let property purchases seems to have declined since 2015, from around 120,000 in that year to around 70,000 in 2017, according to UK Finance.” 

What is stamp duty relief?

Stamp duty relief is a discount that buyers can benefit from when purchasing their first home, meaning they pay less or no tax. It applies to homes bought after November 22 2017 where the buyer, or one of the buyers, is making a first-time purchase.

Ms Turvey said: “No tax is payable by first-time buyers up to £300,000, while the portion between £300,000 and £500,000 is payable at 5%.” 

Stamp duty relief can also be claimed in a number of other scenarios including:

  • multiple dwellings
  • local authorities making a compulsory purchase
  • right-to-buy properties
  • charities

See the government website for full details. 

Are there other exemptions to stamp duty?

According to Gov.uk, you don't pay SDLT or file a return in if:

  • no money or payment is exchanged for a land or property transfer
  • property is left to you in a will
  • property is transferred due to divorce or dissolution of a civil partnership
  • caravans, mobile homes and houseboats 

How is stamp duty paid?

“Stamp duty land tax is a personal tax and liability rests with the purchaser,” said Ms Turvey. “However, normally the solicitor will act as agent and pay the tax on the buyer’s behalf.”

Until March 2019, buyers had a 30-day window to file a SDLT return and pay the tax, but changes brought in by the government reduced this to 14 days.

Do I pay stamp duty in Scotland?

Home buyers in Scotland pay Land and Buildings Transaction Tax (LBTT), which replaced stamp duty in 2015 and applies to residential property or land costing more than £145,000 (or £40,000 for second homes). It's paid on the purchase of freehold and leasehold properties.

There are several rate bands for LBTT, with tax calculated on the element of purchase falling within each band. So buyers pay no LLBT on the first £145,000 of the purchase, 2% on the element between £145,001 and £250,000, 5% above £250,000 and so on. 

Do I pay stamp duty in Wales?

Stamp duty in Wales was replaced by the Land Transaction Tax (LTT) in 2018. In 2019-20, the threshold is £180,000 for residential properties and £150,000 for non-residential land and properties.

Ms Turvey said: “LTT is governed by the Welsh Revenue Authority. It caused some confusion when first introduced; this has appeared to settle over recent months, although many people still refer to LTT as stamp duty. First-time buyer relief does not apply in Wales, and this has caused some confusion and upset.”

Higher rate stamp duty refunds 

Home buyers also have to pay the higher rate if the property they're buying replaces their main home, but that home has not yet been sold. If the original property sells within 36 months, the vendor can apply for a higher rate stamp duty refund. 

Buying a second property can be rewarding and generate a good income, but it’s a significant investment and there’s a lot to think about. Find out what you need to know about becoming a landlord and make sure you have the right landlord insurance in place, to protect your property against any damage or tenants falling into rent arrears.