Housing Market Slowdown after Stamp Duty Changes are Introduced

The number of mortgages taken out by landlords buying new properties plummeted by 85% in April 2016, following the introduction of a new stamp duty rate on second homes. From 1 April 2016, existing stamp duty rates (SDLT) will increase by 3 percent for buyers who are considered to be buying a second property, so it is not just landlords that will be hit but anyone owning a second home. For example, anyone buying a second property or buy to let property worth £125,000 before 1 April 2016 would have paid no SDLT. From 1 April 2016, landlords and second home owners purchasing a property worth £125,000 will have to pay SDLT of £3,750.

Although this drop in mortgages is not a great shock due to purchases spiking in March 2016 ahead of the stamp duty change deadline, what is more telling is the fact buy-to-let purchases dropped by 51 per cent compared to April 2015.

With the unknown effects of Brexit, together with the stamp duty changes, it is unknown as to how long it will take the housing market to recover. Nationwide said “it was difficult to assess underlying levels of demand for housing at the moment given the distortions caused by changes to stamp duty earlier this year and the potential upcoming problems caused by the EU referendum.”

Deciding if the 3% surcharge applies
The higher rates will only apply to additional residential properties purchased in England, Wales and Northern Ireland costing more than £40,000.

The higher rates will not apply if at the end of the day of the transaction the purchaser owns only one residential property, irrespective of the intended use of the property.

If at the end of the day of the transaction the purchaser owns two or more residential properties, whether the purchaser pays the higher rates or not will depend on whether they are replacing their main residence.
Replacing your main residence

In most cases, where individuals move house they may purchase and sell property on the same day. However in some circumstances people may sell their old main residence some time before, or some time after, purchasing a new main residence.

In this situation, if the purchaser has sold a previous main residence within 36 months before the purchase of a new main residence, the purchaser will be considered to be replacing a main residence and the higher rates of SDLT will not apply.

If there is a delay selling your main residence and it hasn’t been sold on the day you complete your new purchase, you will have to pay the higher stamp duty rates, as at the end of the day of the transaction you own 2 properties. However, you may be able to get a refund of the additional SDLT if you sell your previous main home within 36 months.

The new rules can be complex and will affect many people, we would advise consulting your tax advisor before purchasing property to check if the higher SDLT rate applies to you or if you qualify for an exemption from the additional charge.

Vicki Johnston