How to get through the maze of taxation you confront when buying a new house
You must pay Stamp Duty Land Tax (SDLT), a self-assessment tax, when you purchase a property or land over a certain price in Northern Ireland.
The current thresholds are £125,000 for residential properties and £150,000 for non-residential land and properties. With effect from April 1, 2016 the government introduced a controversial higher rate of SDLT on purchases of additional residential property.
This means that the surcharge applies to second homes and rental properties.
The surcharge was introduced to support home ownership and first time buyers but hits investors and second homeowners hard.
In simple terms, the surcharge is payable, if, upon completion of the transaction, the purchaser owns two or more residential properties and is not replacing their main residence.
One of the areas which causes difficulty is the replacement of the purchaser’s main residence.
The Treasury is very strict on the definition of a main residence. This is based on fact. HMRC will take into account where the individual spends their time; where the children go to school; at which residence they are registered to vote; where they work and their correspondence and registration addresses given to various organisations.
You cannot elect which property is your main residence.
This is straightforward when dealing with a sale of a main residence and the purchase of a new main residence, completing on the same day, as the surcharge will not apply.
If, due to delays in the conveyancing process, the purchase proceeds to completion before the sale of the individual’s main residence, the transaction is subject to the higher rate but a refund is available if the previous main residence is sold within three years.
The refund payable is the difference between the amount of SDLT paid under the higher rates and the amount of SDLT that would have been due under the normal residential rates.
It is more complicated when dealing with joint owners, with at least one already owning a property and them being married or in a civil partnership or not.
Each joint purchaser must be assessed separately to see if the surcharge would apply. If it applies to either party, then the surcharge applies to the whole of the transaction.
Unmarried couples purchasing a property jointly as a main residence with one party already an owner of a rental property and one a first time buyer, are liable to pay the surcharge on the total purchase price as, on completion, the couple will own an interest in an additional residential property.
Where an unmarried couple each own a residential property, one of which they both live in, the other being rented out and the one they live in is sold and the rented property retained, the higher rate will apply as they are not married (or in a civil partnership).
The individual with the rental property will not be treated as replacing his main residence as, even though he has been living in the property being sold, he has no interest in this property.
It is somewhat different for married couples as they are treated as joint purchasers of a new property.
Therefore, any other property owned by either spouse will be taken into account when determining whether the higher rate applies.
In the same scenario as the unmarried couple above, the higher rate does not apply to the married couple as they are married and have both lived in the property being sold as their main residence so they will both be treated as replacing their main residence.
Your solicitor will ask you various questions regarding the nature of the transaction that you are proposing, for example; whether you (or any joint purchaser) will own more than one residential property upon completion of the transaction, your marital status and whether the property to be purchased will be a main residence and replacing a previous main residence (in situations where more than one property will be owned on completion) to assess your liability for stamp duty.
Penalties for incorrect filing of returns are punitive so it is essential that you relay the correct information to your solicitor.
- Janeen McKay specialises in property matters within our Newtownards office and can be contacted on 02891811538