Stamp duty land tax (SDLT) refunds: the 3% surcharge and when relief may apply

The 3% additional stamp duty land tax (SDLT) rate can apply when a buyer purchases an additional residential property. While the surcharge is often paid upfront, the SDLT rules include circumstances where a refund may be available.

Below is a practical overview of common scenarios that can lead to an SDLT refund, including the replacement-home timing rules, possible extensions, shared ownership retrospective relief, and a case-law point relevant to certain properties that were not habitable at completion.

When the 3% additional SDLT rate applies

In broad terms, the 3% surcharge is charged where:

• the purchase is of a residential property costing £40,000 or more, and
• the buyer already owns (or part owns) another residential property worth £40,000 or more somewhere in the world, and
• the buyer’s previous main home has not been sold or gifted, and
• no other person has a lease on the previous property with more than 21 years left to run.

This can apply even where the “second” property is intended to be the buyer’s new main residence, and the older property is expected to be sold later.

The replacement-home (36-month) refund route

Where the 3% surcharge has been paid because the buyer still owns their previous main home, the legislation recognises that sales can take time.

The key timing rule

• The buyer must dispose of their previous main residence within 36 months of completing the purchase of the replacement home.

If the replacement-home sale happens within that window, the buyer may be able to seek repayment of the additional 3%.

Extensions for exceptional circumstances

In most cases, the 36-month period is designed to be sufficient. However, the rules also allow for an extension where the buyer could not sell due to exceptional circumstances outside their control.

A commonly referenced example is the impact of the coronavirus pandemic. Where the refund window ended on or after 1 January 2020, an extension may be possible.

Where an extension is granted, the general expectation is that the sale should be made as soon as practicable once the exceptional impediment ends.

Shared ownership retrospective SDLT relief (first-time buyers)

Separate from the replacement-home rules, SDLT refunds can also arise where the surcharge was paid on certain shared ownership transactions.

This relates to first-time buyers who:

• purchase a shared ownership property for £500,000 or less, and
• paid SDLT on the transaction.

A change removed SDLT liability for these transactions and applied retrospectively to purchases on or after 22 November 2017 (as announced in the autumn Budget). This retrospective element is what can create refund opportunities for eligible buyers who paid SDLT at the time.

SDLT refunds for properties that were not habitable at completion (relevant to some buy-to-let purchases)

A more technical area concerns whether the property charged as a “dwelling” was actually habitable at the time of completion.

The issue: what counts as a “dwelling”

The 3% surcharge is tied to residential “dwellings”. Where a second property is purchased with the intention of renovating it as a buy-to-let investment, the question can arise whether the property was a dwelling when the buyer completed the purchase.

Case-law point: P N Bewley Ltd v HMRC

In P N Bewley Ltd v HMRC [2019] UKFTT 65 (TC), the tribunal considered whether properties that were not habitable at completion were “dwellings” for SDLT purposes.

The tribunal’s approach included the idea that, at a minimum, a dwelling should contain facilities for:

• personal hygiene,
• consuming food and drink,
• storing personal belongings, and
• having a place for an individual to rest and to sleep.

If a property does not meet that minimum standard at completion, it may be argued that it does not constitute a dwelling. In that situation, the 3% additional SDLT charge may not apply.

Practical impact

Where a property is treated as not a dwelling, it may be treated as a non-residential property for SDLT purposes. That can change the SDLT rate that applies compared with the usual residential rates.

Evidence and time limits

Refund claims in this area generally depend on being able to show that the property was not suitable for habitation at the relevant time. This often means keeping careful documentation of the property’s condition at completion.

For buyers who incurred the surcharge since 2016 on the basis that the property was uninhabitable at completion, a refund may be possible if the buyer can support the “not a dwelling” position.

Refund claim deadlines (high level)

The SDLT refund process is time-sensitive. While the exact route can vary by scenario, the replacement-home approach is commonly associated with a deadline linked to the sale of the previous main residence.

As a general guide:

• Under the 36-month replacement-home rules, the refund claim is typically made within 12 months after the sale of the previous main residence (or within 12 months from the filing date of a return where a new return is required).
• HMRC may allow deadline extensions in exceptional circumstances (for example, where a sale could not be completed due to Covid).
• Other refund routes may require different submission methods.

Why this matters for buy-to-let investors

Although the 3% surcharge is often discussed in the context of home movers, buy-to-let investors can be affected where they purchase a second residential property and the SDLT position is assessed on the basis of “dwelling” status.

In particular, the uninhabitable-property analysis can be relevant where:

• the property was not habitable at completion, and
• the purchase was made with the intention of renovation and letting.

Because this area turns on detailed facts and evidence about the property’s condition at the time of completion, it’s usually worth taking a careful look at the SDLT position before assuming the surcharge is unavoidable.

This article provides general information about SDLT refunds and the 3% additional SDLT rate. Tax treatment depends on individual circumstances and the specific facts of the transaction and property condition at completion.