Generally, if an individual buys a residential property and they have an interest in more than one residential property at midnight on the day of completion then the 3% SDLT surcharge will apply. Although we are currently in an SDLT ‘holiday’ (where there is a 0% rate of SDLT up to £500,000) this ‘holiday’ does not relate to the surcharge.
The main exception to this general rule is when the property being acquired is a replacement for a main dwelling which has been sold. It is also possible to reclaim a surcharge which has been paid if the new dwelling ‘replaces’ a main dwelling which is disposed of within three years of its acquisition.
Historically this surcharge has been problematic when transfers of property were made from one spouse to another. This was because the 3% rate could technically to a transfer of mortgage obligations (which is consideration). This was dealt with in 2018 with the introduction of a rule which exempts such transactions from the 3% charge (although the spouses do need to be living together).
Quite often the nasty 3% charge can crop up in divorce scenarios where one of the couple remains in the family home.
3% SDLT in divorce scenarios
The major asset in a divorce case is often the matrimonial home. If it is sold with the proceeds being divided up, then there are no particular SDLT issues for the couple. That will be the buyer’s problem.
There are also scenarios whereby both spouses keep a beneficial interest in the matrimonial home, while one spouse leaves to live elsewhere.
Jim and Rachael have two young children and are getting divorced. Although they have joint ownership of the matrimonial home, they agree between them that Rachael will live in the property with their two children until the youngest one is 18, after which time the property can be sold and the proceeds divided. Jim now wants to buy a new property and has been advised that the 3% SDLT surcharge will be payable. Is this advice correct?
Prima facie, this advice is correct because Jim will hold a major interest in two properties at midnight on the date of completion. Also he would not be able to claim under ‘the replacement of main dwelling exemption’ because he would still own part of the matrimonial home. However this will not be the case if the arrangement is done through a ‘property adjustment court order’ (under Matrimonial Causes Act 1973). This is because of a specific exemption in the legislation.
Forbes Dawson view
Although this legislation is useful, it is a pain to have to get a court order to fall within its ambit (although there are many other reasons why a court order may be worth obtaining). It would be simpler if the rule stated that where, as part of a divorce, a spouse or civil partner vacates and buys a new dwelling to be his or her main residence, then that should count as a replacement of the main residence. In cases where the matrimonial home is likely to be sold within three years, it may make sense for the departing spouse to pay the surcharge with a view to claiming it back in the future. This sort of issue is easy to miss when settlements are being reached.
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