Stamp duty trap: young buyers face costly shock
This teacher faces an extra £15,000 stamp duty bill – simply because she tried to plan and be prudent. Sam Meadows reports
Thousands of young people who bought buy-to-lets as a way of getting on to the property ladder are discovering they must pay tens of thousands of pounds in additional stamp duty when they come to buy a home for themselves.
Recent years have seen a growing trend for young professionals – especially those living in costly areas such as the South East – to buy first properties in cheaper areas. They let these out while continuing to rent closer to their work.
But changes to stamp duty introduced by former chancellor George Osborne, applying from 2016, mean that when they come to buy their main home they are liable to pay an additional 3pc stamp duty surcharge. Many only discover this once their purchase is well under way – and the higher bill comes as a shock.
There is a further irony, they say, in that older, better-off people who already owned two homes and who are “replacing” their main residence do not have to pay the extra duty. The policy favours those who already own multiple houses.
Sophie Fernandez, a 32-year-old teacher who lives in north London, bought her first property in Loughborough for £113,000 in August 2015 – months before the stamp duty changes were announced.
She is now ready to purchase her own home, but the prospect of paying an additional 3pc stamp duty means this will be difficult to afford.
A two-bed flat in Finsbury Park, where she is looking with a friend, will cost around £500,000. If this was her first purchase she would pay £25,000 in duty – but the “additional property” stamp duty rules mean her bill would be £40,000.
“I’m sure there are a lot of people in the same situation,” she said. “I am a teacher and lived abroad while saving up for a deposit, but when I got back everything was going over the asking price and I couldn’t afford to buy in London.” That was when she decided to buy elsewhere as a “first foot” on the ladder.
Miss Fernandez bought the property and spent £20,000 and a year renovating it. She suspects she would lose money if she sold it now – so she wants to hold on to it. She said: “It is just so unfair. I bought the property before I knew this was going to happen. If I had known, it wouldn’t have been worth it, and I wouldn’t have gone ahead.”
Nimesh Shah, a partner at Blick Rothenberg, the tax advisers, said Miss Fernandez will struggle to find any way of legitimately avoiding the extra charge. If she was “replacing” her main residence – selling her former residence within three years of the purchase – she would be able to apply for a refund of the additional 3pc charge. However, as she has no main residence to replace, this exemption does not apply.
While a veteran landlord with 50 buy-to-let properties and a main residence could thus avoid the additional charge, Miss Fernandez cannot.
Mr Shah said: “The policy intention was to stop people owning more than one property and that’s why Miss Fernandez is falling into it, but she went into buying the Loughborough property with no knowledge this would come in.
“Now she’s in a position to buy her home and she is being clobbered. The law is catching people out in situations such as this. She is unfortunately a victim.”
Mr Shah said there are two ways Miss Fernandez could avoid the surcharge. Firstly she could take the hit and sell the house in Loughborough before the purchase, meaning she would pay regular costs of stamp duty.
By doing this she would risk crystallising a loss if indeed the sale price is lower than the sums she has invested.
Her other option is more radical: she would have to leave London and move into the Loughborough property. If Miss Fernandez lived in the Loughborough property in the three years leading up to the new purchase, she could argue that she is “replacing” her main residence.
That way she would still pay the higher stamp duty on the new purchase. But, provided she sold the Loughborough house within three years, she would qualify for a refund for having lived there.
A house can be classified as a main residence if the person is registered to vote or registered for a doctors’ surgery at the address, alongside several other criteria.
From its inception the changes to stamp duty for “additional” properties have been beset with
Sophie Fernandez, 32, faces a stamp duty surcharge for buying a second property