Stamp Duty on a House With a Granny Annexe

The One-Third Rule for Annexes

A house with a self-contained annexe can be two dwellings. Under paragraph 5 of Schedule 4ZA to the Finance Act 2003, an individual who buys two or more dwellings in one transaction pays the higher rates, even if they own no other home, where at least two of the dwellings are worth £40,000 or more, are not let on a lease with more than 21 years left, and are not subsidiary to each other. The subsidiary dwelling rule is not a relief: it stops the annexe counting as a second dwelling for that test.

An annexe is subsidiary when all three of these are true:

• Same building or grounds: The subsidiary dwelling must be within the same building as the main dwelling, or within the same grounds. A completely separate property on a different plot does not qualify.
• Two-thirds value rule: The price attributable to the main house must be at least two-thirds of the combined price, apportioned on a just and reasonable basis. In other words, the annexe can take no more than one-third of the price.
• Same transaction: Both dwellings must be acquired in the same transaction. HMRC says the subsidiary rules do not apply where the two are bought in separate transactions, even if those transactions are linked (SDLTM09755).

If all three conditions are met, the purchase is not treated as a purchase of two dwellings, so the 5% surcharge does not apply for that reason alone. If they are not met, a transaction is either liable to the higher rates or it is not: HMRC's example is a £1m purchase of a house with a coach house in the grounds for the buyer's mother, where £350,000 of the price is for the coach house, so the higher rates apply to the whole purchase (SDLTM09766). The exception does not help if you already own another dwelling worth £40,000 or more that you are keeping: paragraph 6 of Schedule 4ZA then applies the higher rates to the whole purchase, unless the new property replaces your only or main residence.

Multiple Dwellings Relief (MDR), which used to soften the bill on these purchases, was abolished by the Finance (No. 2) Act 2024 for transactions with an effective date on or after 1 June 2024, except on contracts exchanged on or before 6 March 2024 and not varied or assigned afterwards. For how annexe MDR claims used to work, see our historical guide to MDR for annexes.

Buying a Property with an Existing Annexe

When you buy a property that already contains an annexe or granny flat, the outcome depends on the structure of the annexe and the value split between the two dwellings. Not all annexe configurations are treated the same way.

Common scenarios

• House with an attached granny flat: Subsidiary if the flat takes no more than one-third of the price, because it is within the same building as the main house.
• House with a detached coach house or converted barn: Can be subsidiary if it is within the grounds of the main house and takes no more than one-third of the price. Being detached does not disqualify it, but the grounds test must be met and the apportionment must stand up.
• Two similar-sized homes on the same land: If the smaller one takes more than one-third of the price, neither is subsidiary and the higher rates apply to the whole transaction, not just one of the homes. Separate titles or postal addresses are not part of the test.

If the annexe is not subsidiary, the purchase is treated as buying two dwellings and the 5% surcharge is added to the standard SDLT rates on the whole price. Use our second home calculator to see the surcharge impact before you exchange contracts.

Buying a Separate Property for Your Parent

If you keep your own home and buy a second property for your parent to live in, the 5% additional dwelling surcharge applies to the entire purchase price. There is no exception for purchases made for the benefit of a dependent relative.

Many people are surprised to learn that there is no dependent relative relief in the SDLT system. In England and Northern Ireland, there is simply no relief available when buying a separate property for an elderly or disabled parent.

Could your parent buy the property instead?

A practical alternative worth considering is whether your parent could buy the property themselves rather than you purchasing it for them. If your parent currently owns their home and sells it before buying a new, more suitable property, they may be able to treat the new purchase as a replacement main residence. In that case:

• Standard SDLT rates apply to your parent's purchase (no surcharge because it is their main residence)
• Your own stamp duty position is unaffected because you are not a purchaser
• Your parent must have the legal capacity and financial means to be the sole purchaser

If your parent cannot buy independently, consider whether a gifted deposit from you combined with your parent buying in their own name is feasible from a mortgage and legal capacity perspective. This is a complex area and specialist advice from a solicitor is recommended.

Converting Part of Your Home

If you already own your home and plan to convert part of it into a self-contained annexe for your parent, there are no stamp duty implications. Converting part of your existing home is not a property transaction: no land or dwelling is being bought or sold, so SDLT does not apply at any stage of the conversion works.

Planning permission may be required from your local authority before you begin the conversion, and building regulations will need to be satisfied throughout the works. However, these are planning and construction matters, not stamp duty matters. The conversion itself carries no SDLT liability.

Future sale considerations

The stamp duty implications arise only when the property is sold or transferred in the future. At that point:

• Selling the whole property: If you sell the main house and annexe together as a single transaction, the buyer will need to consider whether the subsidiary dwelling exception applies to their purchase. Your sale is unaffected by SDLT (sellers do not pay SDLT).
• Retaining the annexe: If you sell the main house but retain ownership of the annexed part, you will have separated what was one property into two. This does not trigger SDLT at the point of separation, but the retained annexe would be treated as an additional dwelling for any future purchases you make.
• Transferring the annexe to your parent: Transferring legal title to the annexe to your parent, even at nil consideration, could constitute a chargeable transaction if there is a mortgage to be considered. Take legal advice before any transfer of title.

When Your Parent Already Owns Property

A frequently overlooked complication arises when your parent still owns their own home and you want to do a joint purchase. If your parent is named on the title deeds of the new property and still owns residential property at the point of completion, the 5% additional dwelling surcharge applies to the entire purchase price.

The surcharge rule looks at all purchasers collectively. If any purchaser owns additional residential property at the date of completion, the surcharge is triggered for the whole transaction. The fact that you may be a first-time buyer, or that the property is being purchased for your parent's benefit, makes no difference.

Strategies to avoid the surcharge

If your parent sells their existing home but does not complete the sale before the new purchase, the 36-month refund window may be available. If the old property is sold within 36 months of the new purchase completing, you can apply for a refund of the surcharge. See our stamp duty refund guide for the full process.

The replacement main residence rules that married couples rely on to avoid the surcharge also apply to parents buying a new main residence. Your parent's solicitor should confirm whether the new purchase qualifies as a replacement of their existing main residence.

Worked Example: £500,000 Property with Annexe

You are selling your current home and buying a £500,000 property with an existing annexe for your parent, as your new main residence. The outcome depends on whether the subsidiary dwelling exception applies. If you were keeping your current home instead, both scenarios would cost £40,000, because paragraph 6 of Schedule 4ZA applies the higher rates even when the annexe is subsidiary.

The entire £25,000 saving comes from avoiding the 5% additional dwelling surcharge. The standard SDLT calculation is the same in both scenarios. For buyers of houses with annexes, this is usually the single biggest stamp duty question.

Scotland & Wales: Different Rules

Stamp duty is devolved in Scotland and Wales. Both countries have their own additional dwelling rules, and the details differ from the English SDLT rules.

If you are buying in Scotland or Wales, always consult a local property solicitor familiar with LBTT or LTT. The devolved systems have their own rules, rates, and reliefs that can differ significantly from the English SDLT framework described in most of this guide.

Frequently Asked Questions