SDLT: supplemental 3% charge on additional residential property purchased by individuals

From 1 April 2016 a supplemental 3% stamp duty land tax (SDLT) charge applies to purchases of additional residential dwellings in England and Northern Ireland.

The legislation is contained in Sch. 4ZA of Finance Act 2003 (FA 2003).

The charge applies to acquisitions made by companies, or non-natural persons, unless the chargeable consideration paid is less than £40,000 or the property is subject to lease with an unexpired term of more than 21 years.

Therefore, the supplemental rate does not apply where the transaction is subject to the 15% charge on acquisitions of high-value residential property by non-natural persons.

The current higher rates of SDLT for transactions with an effective date before 1 April 2025 are:

If more than one dwelling is bought in a single transaction, the surcharge applies to all the dwellings if the relevant conditions are satisfied.

Individuals Conditions

For individuals, the supplemental 3% charge applies on the acquisition of major interest in a single dwelling if (paragraph 3 Sch. 4ZA FA 2003):

1. the chargeable consideration is £40,000 or more;
2. at the effective date of the transaction, the dwelling is not subject to a lease with more than 21 years left to run;
3. at the end of the day of the effective date of the transaction, the purchaser owns a major interest in another dwelling which has a market value of £40,000 or more and that interest is not subject to a lease with an unexpired term of more than 21 years;
4. the dwelling acquired is not a replacement for the purchaser’s only or main residence.

The definition of major interest does not include a lease with a term not exceeding seven years (paragraph 2(4) Sch. 4ZA FA 2003).

Sch. 4ZA provides that references to a major interest in a dwelling include an

undivided share in a major interest in a dwelling (para 2(5)).

For the purposes of Sch. 4ZA a building, or part of it, counts as a dwelling if (para 18 (2)):

(a) it is used or suitable for use as a single dwelling, or

(b) it is in the process of being constructed or adapted for such use

Point (a) leaves the door open to interpretations.

For example, is a dilapidated house a dwelling for these purposes?

ln P N Bewley Ltd v HMRC [2019] UKFTT 65 (TC), the First-tier Tribunal held that a dilapidated bungalow was not suitable as a dwelling and so did not attract the 3% SDLT surcharge because it could not be classed as residential.

The purchaser in that case was a company but what was contested was the definition of dwelling or more specifically the meaning of “not suitable for use as a dwelling”.

So is a house that requires extensive repairs a dwelling and is its acquisition subject to the additional 3% SDLT rate?

Only or main residence

The additional 3% SDLT charge does not apply where a new dwelling is a replacement of a buyer's only or main residence.

Surprisingly, this exemption allows individuals who own two or more dwellings, one of which is a major interest in a dwelling that is or was the purchaser’s only or main residence to acquire an additional property without having to pay the additional charge.

The condition is that the dwelling must be replaced with another to be used as the individual’s only or main residence.

This is not the case when an individual who purchases his or her main residence already owns a major interest in a dwelling as an investment but has not previously owned a freehold or a lease of more than seven years of a dwelling used as his or main residence in the previous three years.

A new dwelling can be the replacement of a purchaser's only or main residence if it is either bought after or before the disposal of an existing dwelling.

New dwelling bought after sale of main residence

Where a person’s main residence has been disposed of before or on the same day as the acquisition of its replacement, the new dwelling will be exempt from the additional charge.

The legislation sets out what is treated as a replacement of an only or main residence for these purposes.

Assuming that the property sold was the purchaser’s main residence, broadly, for the relief to apply:

1. the purchaser, their spouse or civil partner must have disposed of a major interest in the previous dwelling in the three years ending with the effective date of the transaction,
2. neither of them, after the disposal of a major interest in the dwelling, retained a major interest in the same dwelling; and
3. During that period, the purchaser, their spouse or civil partner have not acquired a major interest in any other dwelling with the intention of it being the purchaser’s only or main residence since the disposal of the previous main residence (Para. 3(6), Schedule 4ZA, FA 2003).

New dwelling bought before sale of existing dwelling

When a new dwelling is bought before the buyer's existing only or main residence is disposed of, the new dwelling can still be a replacement of the buyer's existing residence at a later date if together with the other relevant conditions, the effective date of the sale of the old dwelling is within the three-year period beginning with the effective date of the purchase of the new dwelling.

In this case the buyer must pay SDLT at the higher rates and, once the conditions are met, reclaim the additional SDLT paid.

The time limit for the claim is the later of:

• The 12-month period beginning with the effective date of the sale of the old dwelling;
• The 12-month period beginning with the SDLT filing date for the return for the acquisition of the new dwelling.

Regardless of when the old main residence is sold, either before or withing three years from the date of purchasing the new dwelling, it is clear that a degree of uncertainty on the applicability of the relief is due to the interpretation of the intention of the new dwelling being the purchaser’s only or main residence on the effective date of the transaction.

Sometimes difficulties also arise in deciding whether the replaced property was the purchaser’s only or main residence.

In Moaref and another v HMRC [2020] UKFTT 0396 (TC) the First-tier Tribunal held that, for the purposes of the 3% SDLT additional charge, the buyers did not replace their only or main residence when they bought two new apartments with the intention of converting them into one new main residence and then sold their old main residence.

The appellants acquired two apartments in separate land transactions and the 3% additional rate of SDLT was charged on both of them.

Following the sale of the old main residence, the buyers submitted a request to reclaim the surcharge.

The tribunal decided that the buyers did not intend the two apartments to be their only or main residence because their intention was to amalgamate them to be their main residence and the judge held that the purchased dwelling must be the same as the dwelling that the buyer intends to be their only or main residence.

In B Cohen v HMRC [2023] UKFTT 90 (TC) the taxpayer bought a property which needed renovation. Once works were completed he moved into the property but stayed there for only ten days before moving into his parents’ house.

In the meantime he was working on the purchase of a new property for which he had paid a reservation fee before moving into the renovated house.

The stamp duty land tax return submitted in regard to the second purchase did not include any charge to the higher rate of tax on the basis that he was treating it as a replacement of his previous property that had been his only or main residence.

The Tribunal found that the renovated apartment was not the taxpayer’s only or main residence as he lived there for only a short period of time and that was an indication that his occupation was temporary and his intention was for him not to live there even before he moved in and decided the higher rate was due.

Spouses and civil partners

The legislation operates with the effect that spouses or civil partners are entitled to only one main residence between them.

When spouses, civil partners or family members jointly buy a dwelling it only necessary for one of the buyers to satisfy the conditions set out by the legislation for the surcharge to apply.

Non-UK resident buyers

The supplemental 3% surcharge applies in addition to the additional 2% SDLT charged on acquisitions of dwellings carried out by non-UK residents.

Lease extension

The extension of a leasehold interest in a dwelling by an individual buyer is not subject to the 3% SDLT surcharge if the buyer did not own a major interest in another dwelling at the end of the effective date of the transaction for the leasehold extension.

If you need help in finding out whether the additional 3% SDLT will apply on the purchase of residential real estate and how you could mitigate it or want to reclaim the surcharge from HMRC our team is here to help.