What is Stamp Duty and How Does it Work?

07/11/2019

Stamp Duty Land Tax (SDLT) is a tax that homeowners are required to pay when they purchase a property or a piece of land in the UK, that is over a certain value. For residential properties this is £125,000 whilst for properties and pieces of land that are non-residential, this is £150,000. This tax is applied to both leasehold and freehold properties.

Stamp Duty is applicable to throughout England and Northern Ireland. People in Scotland have to pay Land and Buildings Transaction Tax, and in Wales Land Transaction Tax is paid. Stamp Duty is a requirement for residential properties costing over £125,000 within England and Northern Ireland. However, there are some circumstances where this tax does not have to be paid, or when the Stamp Duty is slightly less dependent on the details of the home.

It is important to understand exactly how Stamp Duty works, and how much this costs to effectively prepare for this tax, and further ensure that you are in keeping with UK tax laws. 

How Much Does Stamp Duty Cost?

There are different bands to consider for Stamp Duty tax, with the bands being dependent upon the cost of the property and whether the owner is a first-time buyer or not. For those who are not first-time buyers, the following rates will apply:

Cost of Property

SDLT

£0 - £125,000

0%

£125,001 - £250,000

2%

£250,001 - £925,000

5%

£925,001 - £1.5m

10%

£1.5m and over

12%

These rates will only apply to those who are not first-time buyers, and also on properties that are not second homes; for second homes, different rates will apply. You can calculate how much Stamp Duty you will have to pay by using this government calculator here. The government website states that this calculator can be used for the following purchases:

  • Leasehold properties
  • Freehold properties
  • First-time buyers
  • A main residence
  • Additional property

Different rules apply for “corporate bodies” (i.e. companies and investment schemes) purchasing a residential property that is over £500,000. For purchases of this nature that are over £500,000, a Stamp Duty of 15% is applied.

Do First-Time Buyers Have to Pay Stamp Duty?

In England and Northern Ireland, those buying their first homes will not have to pay Stamp Duty if their property costs over £125,000. Instead, the threshold for first-time buyers is raised to £300,000. This discount (or relief) is only be applicable for properties of £300,000 or under, after this a tax of 5% will be applied for houses costing anything from £300,001 to £500,000.

If the property is over £500,000, standard Stamp Duty tax rules will apply and so you should factor in Stamp Duty from when you start preparing to apply for a mortgage at all. Those who are eligible for this relief are first-time buyers, both for single homeowners and mortgage holders and joint purchase. For those who are wanting to purchase a property with their spouse, both applicants will have to be first-time buyers in order to be eligible for this Stamp Duty relief.

What is the Stamp Duty for Second Homes?

For those who are purchasing a residential property which is not destined to be their main residence or abode (i.e. a second home), an additional 3% SDLT will be applied. This 3% will be applied on top of the standard rates set out in the table above for any property costing £40,000 and over. There are circumstances where this stamp duty will not apply, which include:

  • House boats
  • Caravans
  • Mobile homes

For those who are looking to sell their main residence and move on to another, new property, if the old residence is not sold before purchase of the new property, the homeowners in question could face an increase in their Stamp Duty, as they will at the point of the new property’s purchase, technically own two properties that qualify for Stamp Duty.

If the initial residence is sold within three years of purchasing the new one, you, as the homeowner may well be eligible for a refund on the increased Stamp Duty. You will only be eligible for this refund though if it is claimed within three months of the old property’s sale.

How Do I Pay Stamp Duty?

A Stamp Duty Land Tax payment and return will have to be completed within 14 days of purchasing a property, which will in turn have to be sent to HMRC. If this return is not completed within the required time frame, penalties and interest may be applied to the homeowner’s Stamp Duty tax. Even if there is no tax due, an SDLT return must be completed to that effect.

There are different ways in which Stamp Duty can be paid. This tax can be paid online with a debit or corporate credit card, by posting a cheque, by Bacs and also through your bank. SDLT can also be paid by Fast Payments, CHAPS, or through the applicant’s building society.

Are There Any Exemptions to Stamp Duty Land Tax?

Whilst Stamp Duty Land Tax is often unavoidable for homeowners with properties costing over the threshold, there are some exemptions to this; you may not have to pay Stamp Duty, or complete a return if the following conditions apply:

  1. The property has been left to the new homeowner in a will
  2. It has moved ownership due to divorce
  3. It has moved ownership due to the dissolve of a civil partnership
  4. No payment has been involved in moving ownership of the property

Whilst these are some of the main circumstances which can make a homeowner eligible for SDLT exemption, they are not the only reasons for this.

As a mortgage is secured against your home, your home could be repossessed if you do not keep up the mortgage repayments. Think carefully before securing other debts against your home.

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