Can you avoid the higher rates of SDLT if you still own part of another property worth less than £40,000?

Introduction

Many buyers are surprised to find that owning an interest in a family property can trigger the higher rates of Stamp Duty Land Tax (SDLT) when they later buy a home for themselves. This often happens where a couple live in rented accommodation, but previously bought a relative’s home for family or financial reasons.

A common follow-up question is whether reducing that ownership interest to less than £40,000 before the new purchase would take them outside the higher rates. The answer can be yes in principle, but the details matter, and any transfer must be a real transaction with proper legal and tax consequences.

The Question

A married couple live in rented accommodation and want to buy their own home. Some years earlier, they bought a relative’s house at market value so the relative could remain living there during a period of financial difficulty. The couple did not live in that property themselves.

They now want to know:

• whether they will have to pay the higher rates of SDLT on the purchase of their own home;
• whether they could avoid the surcharge by reducing their ownership in the other property so that their remaining share is worth less than £40,000; and
• whether selling or transferring the earlier property after buying the new home would allow a refund.

Nick’s Explanation

Nick’s core view was that the buyers would usually be subject to the higher rates unless they ceased to hold a chargeable major interest in the other dwelling before completion of the new purchase.

He also pointed out an important practical point: if they buy the new home first and only later dispose of the other property, they are unlikely to be able to reclaim the higher rates. That is because the refund rules for replacing a main residence only apply where the dwelling sold was the buyer’s previous main residence. A property owned for a relative’s occupation, but never occupied by the buyers as their own home, will not normally qualify.

On the idea of reducing their share below £40,000, Nick said that this could potentially mean the higher rates do not apply on the new purchase. However, he also warned that if the transfer is done solely to avoid SDLT, HMRC may scrutinise it. In substance, the point is that the transaction must be genuine, legally effective, and consistent with the parties’ real beneficial ownership.

The Law

The higher rates of SDLT for additional dwellings are found in Schedule 4ZA to the Finance Act 2003.

In broad terms, the surcharge can apply where, at the end of the day of the new purchase:

• the buyer owns a major interest in another dwelling, and
• that other interest has a value of £40,000 or more, and
• the new purchase is not a replacement of the buyer’s only or main residence.

A major interest usually means a freehold or a leasehold interest originally granted for more than 21 years.

The £40,000 test is important. HMRC’s guidance at SDLTM09780 explains that an interest in another dwelling is ignored for higher-rates purposes if the market value of that interest is less than £40,000.

The replacement of main residence rules are separate. A buyer may avoid the higher rates, or reclaim them later in some cases, where they are replacing a previous only or main residence. But that depends on disposing of a dwelling that really was their only or main residence. Owning a property that was occupied by a relative instead will not usually satisfy that condition.

Where buyers try to rely on a property being uninhabitable so that it is not treated as a dwelling, the threshold is now relatively high following Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799. That case confirms that the condition must be serious before a property falls outside the definition of a dwelling for SDLT purposes.

Analysis

Step one is to identify what the buyers own at the effective date of the new purchase. If, on completion day, either spouse or civil partner owns another major interest in a dwelling worth £40,000 or more, that points strongly towards the higher rates applying.

Step two is to ask whether the new purchase is replacing a previous main residence. In this scenario, the couple live in rented accommodation. Their rented flat may be their actual main residence in everyday terms, but because they do not own it, there is no owned former main residence being disposed of. The other property they do own is not one they lived in as their own home. That means the replacement rules are unlikely to help.

Step three is to consider whether reducing the retained share in the other property below £40,000 before the new purchase changes the result. In principle, yes. If, by the end of the day of the new purchase, the buyer’s remaining interest in the other dwelling is genuinely worth less than £40,000, Schedule 4ZA may no longer treat that interest as relevant for the surcharge test.

But that does not mean any paper rearrangement will work. A number of points matter:

• the transfer must actually happen before the new purchase completes;
• the legal title and the beneficial ownership should match the reality of the arrangement;
• the valuation of the retained share must be supportable on a proper market basis;
• there may be SDLT consequences on the transfer itself, especially if debt is assumed or consideration is given;
• there may also be Capital Gains Tax, trust, mortgage, and family law implications.

If the property is mortgaged, the lender’s consent may be required before any transfer of equity. If another person takes on responsibility for part of the mortgage debt, that can itself count as chargeable consideration for SDLT purposes on the transfer.

There is also a wider anti-avoidance point. SDLT is a transaction tax and HMRC can look closely at arrangements that appear designed to produce an artificial result. The issue is not that every tax-efficient transaction is invalid. The issue is whether the transfer reflects a real change in ownership and has real legal and economic effect.

So the basic proposition is sound: a retained interest worth less than £40,000 can fall outside the higher-rates test. But whether a particular transfer achieves that result depends on the facts, timing, valuation, and structure.

Outcome

If a couple own a family property and have never lived in it as their own home, they will usually pay the higher rates when buying their own home unless, before completion, they no longer hold a relevant interest in that other dwelling.

If they later dispose of the family property, they will not usually be entitled to a refund of the surcharge because they are not replacing a previous owned main residence.

Reducing their retained share in the other property to below £40,000 may, in principle, prevent the higher rates from applying on the new purchase. But that only works if the transfer is genuine, properly implemented, and supportable in law and valuation terms.

Practical Steps

If you are in this position, the sensible steps are:

• confirm exactly who owns the other property and in what shares;
• check whether there is any mortgage and whether lender consent is needed for a transfer;
• obtain a proper valuation of the whole property and, if relevant, the retained fractional interest;
• take advice on whether the transfer would involve chargeable consideration for SDLT purposes;
• consider Capital Gains Tax and any effect on the relative living in the property;
• make sure any transfer completes before the purchase of the new home if you want it to affect the SDLT position;
• keep clear records showing the commercial and family reasons for the arrangement, not just the SDLT outcome.

Where the facts are sensitive or unusual, it is also worth checking the SDLT filing position in advance so that the return matches the legal reality on completion day.

Conclusion

Owning a family property can trigger the higher rates of SDLT even if you never lived there. A later sale will not usually produce a refund unless that property was your previous main residence. A genuine pre-purchase transfer that leaves you with an interest worth less than £40,000 may remove the surcharge, but the structure must be real, legally effective, and carefully reviewed for wider tax consequences.

Legal References Used

• Finance Act 2003, Schedule 4ZA
• HMRC Stamp Duty Land Tax Manual, SDLTM09780
• Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799

This page was last updated on 22 March 2026.

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