Taxing Times: Let the Second Home Buyer Beware

From now on, anyone purchasing a residential property as a second home or “buy to let” where the purchase price is over £40,000 will face a significant one-off charge amounting to 3% of the price.

The Land and Building Transaction Tax (LBTT) replaced the Stamp Duty Land Tax (SDLT) in Scotland for land transactions, taking effect April 2015. This progressive tax is applied to residential and commercial land and building transactions where a chargeable interest is attained. The charge itself is more proportionate to the actual price of the property as, under the LBTT, the percentage rate for each band is only applied to the part of the price over the relevant threshold and up to the next threshold.

In December 2015, the Scottish Government planned an additional LBTT charge on the purchase of second residential properties in Scotland, taking effect 1st April 2016. As a result, homeowners who want to buy a second home or buy a property with the intention of letting it out will have to pay a tax charge of 3% on top of the current LBTT rate.

Residential property rates Existing LBTT rates Additional Homes supplement *
Up to £40,000 0% 0%
£40,001-£145,000 0% 3%
£145,001-£250,000 2% 3%
£250,001-£325,000 5% 3%
£325,001-£750,000 10% 3%
£750,001 and above 12% 3%

*Supplement only payable on transactions above £40,000. The 3% supplement would be applied to the whole purchase price and not just the proportion of the price above £40,000.

Here are some key examples of how the new property charge may affect you:

(Source: www.gov.scot)

Determining Main Residence

Most people only have one home at a given time. If an individual has more than one property, it is usually clear which is the main residence. For instance: an individual may own two properties – one in which they live and the other which is let out.

Individuals who own more than one property cannot decide which their main residence is. This is for the purpose of calculating the LBTT additional supplement.

To decide if a certain property is a person’s main residence, HMRC will take the following factors into account:

  • Where the individual and their family spends their time
  • If the individual has children, where they go to school
  • At which residence the individual is registered to vote
  • Where the individual works
  • The location and degree of furnishing and location of moveable possessions
  • The correspondence and registration addresses given to various organisations

Question: “I’ve sold my house and bought a new one but there’s a delay. Will I be charged the higher rates since I technically have two properties?”

The Government will apply an 18 month period between the sale of a previous main residence and purchase of a new main residence. This is to determine whether the 3% supplement will apply.

For example, Mr G sold his property, which was his main residence, 3 months ago. He owns another property which he lets out. Mr G has lived in rented accommodation since the sale of his main property. Mr G then purchases a new residential property to be used as his main residence. At the end of this transaction, Mr G has two properties. However, as he is replacing his main residence (purchasing a new main residence within 18 months of selling his previous main residence) the additional 3% will not apply.

Similarly, an individual such as a property developer who owns multiple properties will not have to pay the additional rate if they are only replacing their main residence. The new rules apply only to second and additional homes.

Question: “I want to rent out my previous main residence and buy a new house”.

If an individual decides to rent out their current property as an alternative to selling it and buys a new main home, then that individual will be seen as having purchased an additional home. Therefore the 3% supplement will apply.

Married Couples and Civil Partners

The Government will treat married couples and civil partners as one unit, therefore preventing couples avoiding the 3% supplement by purchasing additional properties in sole names. Thus, married couples and civil partners may own one main residence between them but if an individual in a partnership decides to purchase another property, then the additional rate will apply.

Question: “I own a home which I purchased before I was married. My wife and I currently reside there. My wife wants to purchase a property to rent out. Will the higher rates be applied?”

As one unit, at the end of the transaction, you own more than one residential property which is not being replaced as a main residence. So yes, the higher rates will apply.

Inherited Properties

Individuals inheriting residential property will not be charged the extra supplement however; it will be taken into account if the beneficiary then goes on to purchase an additional residential property.

Question: “I own a property which I use as a main residence. I’ve just inherited a property from my parents. Will I be charged the higher rate as I own two properties?”

An inheritance is not chargeable to LBTT so you won’t pay the higher rate even though you technically own two properties.

Question: “I own my own property and have inherited a property from my grandfather. I want to sell my inherited property and purchase a buy-to-let with the proceeds. Will the higher rates apply?”

At the end of these transactions, you will have two residential properties and you have not replaced your main residence. Therefore you will pay the supplement on the purchased buy-to-let property.

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