Buying property in the UK is rewarding, though not without its challenges. A common conundrum is stamp duty. A necessary evil by all accounts, this hefty tax can make or break a house sale. Working out if and how much you should pay isn't that hard, for the most part, but there are a few sticking points. Here's all you need to know about stamp duty.
Brief History of Stamp Duty
In the UK, stamp duty was first imposed in 1694 as a fee applied to written documents like cheques and deeds that required a Royal seal. The papers were stamped as proof of payment, hence the name. It gradually applied to the sale of other products too, from mittens to gold. But in recent years, this type of duty can only be levied on the transfer of residential property. So today, stamp duty is short for Stamp Duty Land Tax (SDLT), a tax on transactions of land. It can only be levied in England and Northern Ireland. Scotland and Wales have their own types of transaction tax, and they make no reference to the phrase 'stamp duty'.
Who Should Pay Stamp Duty?
Stamp Duty does not apply to gifts or property left in a will. It also doesn't apply to caravans, mobile homes, houseboats or lodges. Property transferred through separation, divorce, or end of civil partnership is also exempt.
Anyone buying the freehold or leasehold of a residential property or piece of land in England or Northern Ireland for more than £125,000 must pay SDLT. It's a tiered rate tax, and it depends on the selling price of the property and the number of properties the buyer already owns.
Courtesy of gov.uk, a Stamp Duty calculator is available to use for free online. For Scottish and Welsh rates, you can try this calculator. As of November 2019, SDLT rates are as explained below.
On a home classified as a 'main residence':
• 2% of value between £125,001 and £250,000
• 5% of the portion between £250,001 and £925,000
• 10% for the amount between £925,001 and £1.5m
• 12% of anything above £1.5m +
For a property classified as an 'additional home', the rates are 3% higher for the tiers described above. Also, the first tax bracket corresponds to houses with a price of at least £40,000.
Reduced Stamp Duty Rates
There is only one exception to the rule above: first-time buyers must only pay if the property costs more than £300,000. For property worth under £500,000, their tax rate is only 5% of the portion for the portion over £300,000.
A first-time buyer is any person of age who has never bought residential property anywhere in the world before. To qualify for a reduced rate, they must never have bought freehold or leasehold properties before, except for commercial properties with no living quarters.
As of 2018, Shared Ownership properties are also included in the tax relief scheme. Any first-time buyer can now claim back Stamp Duty paid on a Shared Ownership property bought on or after 22 Nov. 2017.
When buying property jointly, all signees must be first-time buyers, or they all forfeit their reduced tax rate. Failing this, additional home owners can sometimes recoup part of their loss by selling the main residence in less than three years and claiming back any Stamp Duty above the standard rate.
Stamp Duty Comparison
For example, stamp duty on a house with a price tag of £400,000 amounts to £5,000 for a first-time buyer.
£300,000 × 0% + £100,000 × 5% = £5,000
For the same house, anyone wishing to buy it as their main residence would pay:
£125,000 × 0% + £125,000 × 2% + £150,000 × 5% = £2,500 + £7,500 = £10,000
Then there's the buy-to-let or 'additional properties' category. Any buyer who would not make this property their main residence would pay:
£125,000 × 3% + £125,000 × 5% + £150,000 × 8% = £10,000 + £12,000 = £22,000
When Is Stamp Duty Due?
Up until 28 Feb. 2019, you had 30 days from the effective transaction date to file and settle your SDLT return. Depending on the type of property and your contract, the transaction date can be the day you take possession, the day the first rent becomes due, or the day most of the payment is received.
Currently, the time limit is 14 days. In practice, solicitors usually handle these payments, so payment becomes due as soon as you take possession. For buyers who want to pay their stamp duty personally, HMRC accepts online payments, card payments, debits, CHAPS, Bacs cheques, and in-branch payments.