In most parts of the UK, you are required to pay stamp duty when you buy property above a certain market value. Since 1694, stamp duty has been used in the UK as a form of tax placed on documents, publications, and other amenities. The tax was often certified by a physical stamp being pressed onto the document in question – hence the name!
The tax on buying property that we now know as Stamp Duty Land Tax (SDLT) is a stamp duty only in name. Introduced quite recently in 2003, its modern function bears no resemblance to the old tax on legal instruments. Rather, SDLT is in fact a ‘transfer tax’ that applies only to transactions of land and property. Now that you know the history, it’s time to understand how it works!
For a simple overview of how stamp duty works it’s necessary to understand the different rates that are levied for properties of different prices, as well as the discrepancies that exist for first-time buyers and buyers who already own property. As such, we have written a no-nonsense and jargon-free guide to stamp duty as it stands in late 2017.
What are the standard rates for stamp duty?
The standard rates for stamp duty apply when you are buying a home (either leasehold or freehold) that costs more than £125,000. This threshold is reduced to £40,000 on any additional properties you may purchase and the standard rates do not apply in the case of first-time buyers (more on these discrepancies below). Scotland has an independent land tax system which differs from the system used in England, Wales and Northern Ireland.
The amount of stamp duty paid depends on the price of the property being bought. As such, properties above the £125,000 threshold will pay rates conforming to the following bands:
- Between £0 and £125,000 the rate is 0%
- Between £125,001 and £250,000 the rate is 2%
- Between £250,001 and £925,000 the rate is 5%
- Between £925,001 £1.5 million the rate is 10%
- Over £2.5 million the rate is 12%
For example,a property costing £600,000 falls within the first three tax bands, so the buyer will pay £0 (0% rate) on the first £125,000, £2,500 (2% rate) on the next £125,000, and £17,500 (5% rate) on the remaining £350,000. This means that a buyer (who has previously bought and currently doesn’t own property) will have to pay a total of £20,000 in stamp duty for a property of this value. You can calculate your own stamp duty costs by using the government’s handy online calculator.
While these standard rates still apply in most cases, you may have seen in the news recently that the rules have changed for first-time property buyers…
Autumn budget updates in 2017
During the 2017 Autumn budget this month, it was revealed that first-time buyers will no longer have to pay any stamp duty on the first £300,000 of a home costing up to £500,000, with the rate between £300,000 and £500,000 remaining at 5%. This has the effect of essentially abolishing stamp duty for first-time buyers paying £300,000 or less on their new home, therefore cutting costs for 80% of buyers throughout the country.
Those spending the maximum of £500,000 will save £5,000 compared to the previous system, and the average savings for first-time buyers will be around £1,700 according to chancellor Phillip Hammond. Properties with prices above the threshold of £500,000 will see no change in stamp duty rates, and will instead pay the standard rates detailed above. This new system applies to completed purchases made on or after 22 November 2017.
Note: if you are buying a property for the first time but you are buying it with somebody who has owned property before, you will unfortunately not be eligible for the new stamp duty cuts.
What about additional properties?
People who purchase additional properties on top of their main residential property (as in the case of second homes and buy-to-let homes) are subject to higher stamp duty costs. With additional homes bought for £40,000 or more, there is an extra 3% on the rates within each price band. So if you are buying an additional property for £200,000 you will pay a total of £7,500 as opposed to £1,500 if it was your only property.
The increased rates even apply in the cases where a new home has been bought but an old home has not yet been sold, as these buyers are buying an additional property on top of their current property (even though they do intend to sell it). Although buyers in this situation have to pay the increased stamp duty on their new residence for as long as they are attempting to sell their old residence, they can still request a refund of the higher rates if they sell the previous property within three years of purchasing their current property.
There are some cases in which the stamp duty a buyer has to pay is either significantly reduced or waived completely due to the circumstances of their purchase. Of course, there will be no stamp duty at all on properties costing under £125,000, as rates stand at 0% within this band. Furthermore, there is no stamp duty for first-time buyers purchasing a property that costs £300,000 or less. But even when the value of a property exceeds these bottom-line rates, a buyer may still be entitled to certain exemptions.
For instance, when the deeds of a property are transferred through wills or through the dissolution of marriages and civil partnerships, the recipient will not have to pay any stamp duty on the property they now own. There are also a number of reliefs and exemptions that apply when property is bought by charities, private companies, public bodies and property developers. For a comprehensive list of stamp duty exemptions and reliefs, check out this list by HM Revenue and Customs.
Although not a formal government exemption, house prices that creep slightly into a higher band (e.g. £250,010) could be reduced by your estate agents or sellers. It’s certainly worth raising this issue directly – just remember to ask very nicely!
If you’re currently looking to purchase a new property, take a quick look at the sales we currently have available throughout South West London.