Financial Planning

A Short Guide to Stamp Duty

A Short Guide to Stamp Duty

It certainly seems to be the case that house prices across the UK are not really rising across the UK in 2018-19. Despite this, however, increasing numbers of people are still having to pay stamp duty on their property purchases.

What is stamp duty exactly? How does it work, and is there a way of planning ahead in order to get a good deal when looking to buy a home?

Let’s turn our attention to those questions now in this short guide:

Stamp Duty: Overview

Stamp duty is often used as a shorthand for “stamp duty land tax” (or land and buildings transaction tax, if you live in Scotland). It is a lump payment that you make to the taxman when you buy a particular type of property, over a certain value.

The system is a bit fairer now than it used to be. Prior to 2014 everyone paid the same rate on the property price. Nowadays, it is a bit more complicated but progressive.

Here’s how it works (in England & Northern Ireland):

Let’s suppose that you are looking to buy a property worth £450,000. You will pay no stamp duty on the value of the house below £125,000. You will pay 2% on anything between £125,000.01 and £250,000, which would be about £2,500.

After that, you pay 5% on the property value above £250,000.01 – which is nearly £12,500 (i.e. £200,000 x 0.05). In total, therefore, you would expect to pay around £15,000 stamp duty land tax on a £450,000 property.

First-time buyers

The system is a bit different, however, if you are first-time buyer in England or Northern Ireland.

Here, you do not pay stamp duty on the first £300,000 of a property’s value (the property is under £500,000). You are then taxed 5% on the value between £300,000.01 and £500,000.

So in the example above, the total stamp duty on a £450,000 property would work out differently in the case of a first time buyer. I.e. you would pay 0% on the first £300,000, and then the next £150,000 would be taxed at 5% (i.e. about £7,500).

Just remember that if you are looking to buy a property over £500,000, then you will have to work under the standard tax system described in the first section above.

Am I a “first-time buyer”?

If you have never previously owned property, then you legally are deemed a first-time buyer.

This means that if you inherited a property (e.g. from your late grandfather), you do not count as a first-time buyer. If you are in your late twenties, however, have never had an inheritance like this and have only ever rented up until this point, then you count as a first-time buyer.

Additional properties

The rules above apply to your residential home – i.e. the property you live in.

If, however, you are looking to buy a second home or a buy-to-let, then different stamp duty rates will apply to you.

For example, suppose you already have a mortgage for your home and you a looking to purchase a buy-to-let property worth £500,000.

You will pay 3% on the value between £40,000.01 and £125,000, which is nearly £2,550. You then pay 5% on the value between £125,000.01 and £250,000 (i.e. around £6,250). After that, you would pay 8% on the rest – which is about £20,000.

So in total, in this case, the stamp duty would be around £28,800.

How stamp duty is paid

You have less than 30 days to pay stamp duty once you have completed your property purchase (i.e. you have the house keys and all of the contracts are signed).

If you fail to do this then you could face a heavy fine and possibly an interest payment. So it is really important that you do this well ahead of time.

Your solicitor should assist you with this, and in all likelihood will make all of the arrangement on your behalf. Check with them, however, just to be safe!

If you are paying the bill yourself, then you can usually do this online or over the phone using the HMRC’s website and/or bank account details. You’ll just need your Unique Transaction Reference Number (UTRN), which should be found on your paper stamp duty return.

What if I cannot afford the stamp duty?

It might sound harsh, but part of the process of buying a property is to take all of its associated costs into account – including stamp duty.

Remember that when it comes to buying a home, you do not simply pay the property price agreed with the seller. There are other large fees too including solicitor fees, surveyor costs and of course, stamp duty.

If you do not have the money to afford the stamp duty on a property, then you might need to look at buying a cheaper home or trying to get money off the asking price.

Another option is that you could add the stamp duty onto your mortgage. In this case, you take a bigger mortgage out to not only cover the property value but the stamp duty as well.

This might sound like a good idea, but you should avoid it if you possibly can. Remember, a mortgage can last 35-30 years. So you would not just be paying interest on the property value during that time, but on the stamp duty as well. That could amount to thousands of pounds.

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