How to (legitimately) reduce stamp duty on your second home

Purchasing a second home is a luxury at today’s house prices – and the taxman agrees. Second home owners are liable for a higher rate of stamp duty and must pay a 3 per cent tax surcharge on additional property.

The 3 per cent surcharge is added to each of the tax bands which apply to standard property purchases, so you will pay stamp duty at a rate of 3 per cent on the value of a property up to £250,000 – the nil-rate threshold for anyone buying one home to live in.

You will then pay 8 per cent (5 per cent + 3 per cent) on the value of a property above £250,000 up to £925,000, 13 per cent (10 per cent + 3 per cent) on the value between £925,000 and £1.5m and anything higher is charged at 15 per cent (12 per cent + 3 per cent).

The surcharge adds a hefty premium to second home purchases. Someone buying a £800,000 house as a second home would pay £51,500 in stamp duty, in contrast to a £27,500 tax bill if it was their only home. 

HM Revenue & Customs takes a strict view of what qualifies as a second property, but there are ways to reduce how much you hand over to the taxman.

The three-year rule

You may be able to apply for a refund on the 3 per cent  stamp duty surcharge if you sell your main residence within 36 months of completing on a second property. 

To qualify, you must send the request to HMRC within 12 months of the sale of your main residence or within 12 months of the stamp duty return for the new residence being filed, whichever is later.

Under exceptional circumstances, you may still be entitled to a stamp duty refund if you sell your main residence later than three years after purchasing the second – such as where a public authority has prevented the sale. 

Under exceptional circumstances, you may still be entitled to a stamp duty refund if you sell your main residence later than three years after purchasing the second.  

HMRC extended the time limit in June 2020 to account for delays caused by the pandemic. The delay must have been caused by something outside of your control that could not have been foreseen, such as government coronavirus restrictions preventing a sale or where delays at a public authority have delayed a sale. 

The bar to qualify for an extension is high and the main residence must be sold before HMRC will consider whether the circumstances are deemed exceptional. Government guidance states that each case will be decided on an individual basis, but the exceptional circumstances must be “very rare and well outside of the norm”. 

A buyer merely pulling out of the sale at a late stage, collapsed chain or a seller backing out of a transaction to avoid making a loss on the property will not qualify for the extension. HMRC clearly states these incidents are “expected to occur in the ordinary course of buying and selling property”.  

If you believe you qualify for an extension to the three-year rule you will need to write to HMRC directly. Take time to collate all evidence and explain the circumstances properly – once the taxman has made its decision there is no right to appeal, so you only get one shot.  

Explain what the exceptional circumstances were, how they prevented the sale of your main residence and why they could not have been foreseen. You will also need to demonstrate that once reasonably possible, you completed the sale of your main home.

Mobile homes

Certain types of dwellings are exempt from the stamp duty surcharge, such as mobile homes, caravans and houseboats.

Negotiate on price

A reliable way of reducing your stamp duty bill is to haggle on the purchase price. The 3 per cent surcharge does not apply to property transactions worth less than £40,000, although you will struggle to find a home within this budget. Instead you can negotiate with the seller to reduce the property price into a lower stamp duty tax band. 

The current downturn in the housing market has forced one in 10 sellers to reduce their asking prices by at least 10 per cent  and created a buyer’s market ripe for haggling. 

If you are not in a chain, use this to your advantage – sellers have been known to forgo tens of thousands of pounds in exchange for a quick and pain-free sale.