Additional 3% stamp duty land tax surcharge on granny flats and other dwellings
Originally posted by John Shallcross on 3 January 2017 and updated on 2 May 2018.
The higher rates of SDLT, introduced on 1 April 2016, are intended to apply to purchases of additional residential properties, such as second homes and buy to let properties. But there was a glitch in the 'higher rates' rules as they applied to properties with granny flats or other subsidiary dwellings. This article looks at the issues for these transactions and similar transactions involving several dwellings.
As the rules were initially drawn, someone buying a property which counts as two dwellings would be liable to an extra 3% SDLT on the whole price above the 'normal' SDLT that would be due. This was the case even if it was going to be the buyer’s only property or if it was replacing the buyer’s only or main residence.
It will not always be straightforward to know if a property counts as a single dwelling or as more, nor whether the surcharge applies. For further information on the above or any SDLT query please contact Blake Morgan's SDLT expert, John Shallcross. For a more detailed article on this with further examples see HERE.
Those rules were altered by an amendment made during the passage of the Finance Act 2016 which gained Royal Assent on 15 September 2016. The explanatory note issued with the amendments explains: “The amendments affect purchasers of dwellings with self-contained annexes or outbuildings that are, themselves, dwellings. These purchasers will not be subject to the higher rates of SDLT only because they have purchased such a pair of dwellings. The purchases will still be subject to the higher rates of SDLT if the purchaser already owns another dwelling and is not replacing a main residence.”
A new test, which I will call the 'subsidiary dwelling test', has been introduced with retrospective effect by the Finance Act 2016. This test applies where a single transaction comprises two or more dwellings. The amended rules apply where:
- On making a just and reasonable apportionment of the price, at least two thirds of the price is paid for the main dwelling.
- The subsidiary dwelling is part of the same building as the main dwelling or is within the grounds of the main dwelling.
It is not relevant how the subsidiary dwelling is to be used (for example it could be let out rather than used for a family member). Nor is there any requirement as to planning conditions requiring the subsidiary dwelling to be occupied or disposed of in limited ways.
HMRC on 29 November 2016 issued a revised Guidance Note on the surcharge generally. It deals with these granny flat cases at paragraphs 2.10A - 2.10E. The Guidance Note was withdrawn soon after the guidance was moved into the HMRC Manual wat the end of March 2018. It can now be found in SDLTM09755.
Multiple dwellings relief
There is an important point about the application of Multiple Dwellings Relief (MDR) in transactions involving several dwellings. MDR works by calculating the SDLT on each dwelling by reference to the average price of all the dwellings. Savings in SDLT can therefore be achieved due to the multiple use of the lower rates in the SDLT charging bands. It seems, on a close reading of the rules as they have been amended, that in some cases (including many purchases of properties with granny flats) MDR can be obtained without the surcharge automatically becoming due.
There are now different amounts of SDLT that can be due on purchases of residential property depending on the exact circumstances. To illustrate this, let us take different purchases, all for £800,000, of different properties and calculate the amount of tax. If you are buying a single dwelling and you aren’t sure if the additional rate applies, see our earlier article HERE.
Example 1. Purchase of single dwelling without surcharge
Based on someone buying what will be their only property, or buying a house which counts as a replacement of their only or main residence, the surcharge does not apply. The SDLT on a price of £800,000 at slice rates is £30,000.
Example 2. Purchase of single dwelling with surcharge
Someone is buying a second home or a property to rent out where they already own a property, so that the surcharge applies. There is extra SDLT of 3% on the whole £800,000; the surcharge is £24,000 on top of the normal SDLT of £30,000 giving total SDLT of £54,000.
Example 3. Purchase of single dwelling with non-residential property attached
A single purchase of £800,000 might include some non-residential property, such as (a) a house with land that is not part of the garden or grounds but which is let out to a farmer or (b) a property with a shop below or attached. In this circumstance, different non-residential slice rates of SDLT apply and there is no question of the surcharge applying. SDLT will be £29,500 worked out as follows:
Up to 150,000 0% £ 0
Above 150,000 and up to 250,000 2% £ 2,000
Above 250,000 5% £ 27,500
Example 4. Purchase of house with granny flat without surcharge
Under the amended rules it is possible for someone to buy in a single transaction a property which counts as two dwellings and not pay the surcharge. For this to be the case, the following subsidiary dwelling test is applied:
- the less valuable dwelling must be a part of the same building as the more valuable one (or in the grounds of the more valuable one)
- the more valuable property must be 2/3 or more of the value (so over £533,333 in the case of a purchase for £800,000).
For the surcharge not to be due, the property might be the buyer’s only property, or he might be replacing an only or main residence by moving into the more valuable of the two dwellings being bought.
On the face of it, the SDLT in this example would be the same as in example 1 above; £30,000.
If as it is believed to be the case MDR can be claimed without incurring the surcharge then the SDLT is £20,000 calculated as follows:
2 x £10,000 (£10,000 being the SDLT on the average price of £400,000 without the surcharge).
Example 5. Purchase of house with granny flat with surcharge
The surcharge might be due for a number of reasons on the purchase of a property in a single transaction which counts as two dwellings. For example, the transaction might not satisfy the subsidiary dwelling test:
- by neither being in the same building nor one being in the grounds of the other or
- the more valuable one might not be worth as much as 2/3 of the total price.
Or it could be that the subsidiary dwelling test is satisfied, but the surcharge still bites because the buyer has other property interests and is not replacing an only or main residence.
The SDLT in example 2 was £54,000, but that can be reduced in this case where there are two dwellings by a claim to multiple dwellings relief. The SDLT then is £44,000 calculated as follows:
2 x £22,000 (£22,000 being the SDLT on the average price of £400,000 with the surcharge).
Example 6. Purchase of two dwellings in transactions which are not linked, one with the surcharge
An example would be someone who buys adjoining residential properties from totally unrelated sellers. Let us assume the £800,000 is fairly broken down to £600,000 and £200,000.
The granny annex rules will not apply because the properties are not bought in a single transaction. The linked transaction rules cannot apply because the sellers are unconnected.
We will assume that the surcharge does not apply on the more valuable property (perhaps because the replacement of only or main residence exception applies to it) but the surcharge does apply to the less valuable property.
Using slice rates as in Examples 1 and 2 we get SDLT due of £27,500 as follows:
On the £600,000 without the surcharge: £20,000
On the £200,000 with the surcharge: £ 7,500
We do not need to do the special calculations for linked transactions. Multiple Dwellings Relief is not applicable as the transactions are not linked (in fact the calculation already gives the benefit of two sets of lower rates).
Example 7. Purchase of two dwellings in linked transactions, one with the surcharge
A property is to be bought for £800,000, but it turns out that different connected sellers own different parts of the property. For example the husband seller owns the main house; his wife owns the gardener’s cottage. The granny flat rules cannot apply here as the properties are not in a single transaction, but in two linked transactions.
Let us assume the £800,000 is fairly broken down to £600,000 and £200,000.
We will also assume that the surcharge does not apply to the more valuable property (perhaps because the replacement of only or main residence exception applies to it) but the surcharge does apply to the less valuable property.
Now the calculations get more complicated. The total SDLT for the two linked transactions is £26,000 if MDR is claimed, calculated as follows:
The total consideration for the two linked transactions is £800,000.
Without the surcharge, but with MDR, the SDLT on the total price would be £20,000 (SDLT of 2 x £10,000 on the average price of £400,000 without the surcharge) as in example 4.
With the surcharge and claiming MDR, the SDLT on the total price would be £44,000 (2 x £22,000 on the average price per property of £400,000 with the surcharge) as in example 5.
So the calculation is:
For the house (without the surcharge): £600,000 / £800,000 x £20,000 = £15,000
For the cottage (with the surcharge): £200,000 / £800,000 x £44,000 = £11,000
We add £15,000 to £11,000 to give £26,000 tax due.
First Time Buyers’ Relief
First time buyers' relief was introduced for some purchases for up to £500,000 by the Autumn Budget of 22 November 2017. But the relief can never be available where two or more dwellings are acquired in a single transaction. Nor can the relief apply where the surcharge applies. For information on this relief please see HERE [link to publication 9]
So a set of purchases for £800,000 incur different amounts of SDLT as follows:
Example 1: £30,000
Example 2: £54,000
Example 3: £29,500
Example 4: £20,000
Example 5: £44,000
Example 6: £27,500
Example 7: £26,000
It will not always be straightforward to know if a property counts as a single dwelling or as more, nor whether the surcharge applies. For further information on the above or any SDLT query please contact Blake Morgan's SDLT expert, John Shallcross. For a more detailed article on this with further examples see here:
This article is intended for general information purposes only and does not constitute legal or professional advice. Some of the examples are not covered by HMRC guidance and the official view of HMRC on the correct analysis is not known. Advice should be sought before proceeding with any transaction.