If you inherit property, there is usually no Stamp Duty Land Tax (SDLT), unless the beneficiary is paying money into the estate or paying other beneficiaries. However, there are an increasing number of people getting caught up in an SDLT ‘trap’ when circumstances relating to the inherited property change.
The additional 3% SDLT surcharge, which was introduced back in April 2016, applies to all additional properties purchased, which are not replacing a main residence. This also applies where the property chain has broken down – you can read more about this in a previous post here.
There may be other situations where the additional surcharge applies, here is one example to consider.
David and Sarah, who are brother and sister, have inherited a freehold property in London from their late father, worth £500,000. They already own one mortgaged property each, which are their main residences.
The siblings will pay no additional SDLT on inheriting their father’s property, however, Sarah then chooses to sell her half to David. He agrees, but at the point of handing over £250,000 for her share, he will also be caught out by the additional SDLT surcharge. Before April 2016, the brother would have paid Stamp Duty of £2,500, but, following the introduction of the surcharge, he is now liable to pay £10,000 in SDLT.
The additional 3% surcharge applies because the brother is already a homeowner. Therefore, the transaction with his sister would mean he’d acquired an additional dwelling even though he has already inherited part of it – in the same way as if he’d bought a completely different house.
If David was not a homeowner, he would not pay the additional surcharge. If he had never owned property, and was in fact a first time buyer, he wouldn’t pay any SDLT at all, as the price he is paying is fully covered by the First Time Buyer relief. However, if he then chooses to purchase his own home at a later stage, but retains his father’s property, he will need to pay the additional 3% surcharge on the value of the new home. This is because David will own a main residence, as well as his father’s property.
The 3% charge still applies at the point of David’s new home purchase, even if he chooses to rent out his father’s property, and not declare his father’s home as his main residence. This is because there will be a second transaction, which will result in David owning more than one property, and therefore the charges will apply.
However, should David choose to sell his father’s home within three years of inheritance, he can apply for a refund of the SDLT he has paid.
There is further good news. Where a half share (or less) of a house is left directly to a beneficiary, who within three years purchases another property, the interest in the inherited property can be ignored for purposes of calculating the additional SDLT surcharge.
In David and Sarah’s case, as joint owners of their father’s house, if Sarah chooses to sell her main residence within three years, no higher SDLT is chargeable when she purchases her replacement main residence. This is because she only has a 50% share of the property and inherited it within three years of her purchase.
If Sarah owned more than 50%, or indeed she purchases her new residential property after the three year period, the higher rate of SDLT will apply as it will be considered a majority interest in another dwelling.
Every situation is different so it is best to seek advice for your particular circumstances. For further information, speak to the tax team at Wilkins Kennedy who will be able to assist.