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Stamp Duty: How Does It Work?

stamp duty on homes

When budgeting for a new property, there’s always something that people forget to include in their sums. Sometimes it’s the cost of moving, sometimes it’s life insurance, and sometimes it’s protection cover. While these are all extremely important, there’s still one thing that people often slip people’s mind when thinking about how much they need to borrow: Stamp Duty.

While you might think you’re familiar with how this tax works, keep in mind that the Chancellor of the Exchequer made some substantial changes to stamp duty rates back in 2014, so if you haven’t gotten a mortgage since then, things may be different from how you remember.

Like many taxes, it’s unavoidable, so it’s crucial that you factor it into your budget calculations. If you don’t, you could find yourself in a whole heap of trouble when it comes to trying to purchase that dream property.

Unsure of how Stamp Duty rates work? Read on to find out more

What is Stamp Duty?

If you’ve never dealt with mortgages before, you might have never come across the term “Stamp Duty Land Tax,” before. Don’t worry. It’s isn’t difficult to understand.

The tax as we know it today was first introduced in 2003 and applies to both freehold and leasehold properties in England and Northern Ireland. Designed to cover the cost of all the legal documents for the purchase, paying it proves that the ownership of the land has changed from the previous occupant to you. If you don’t pay this tax, then legally you will not be able to officially purchase the property.

The tax still applies if you’re getting a mortgage or buying your property outright.

Do I Have Pay Stamp Duty?

Like most taxes, Stamp Duty rates don’t apply to everyone, so make sure you are aware if you fit the criteria to be charged.

The first significant group of people who won’t be affected are first-time buyers. As of November 2017, Stamp Duty changed so that all first-time buyers purchasing a property under £300,000 were exempt from paying it. However, if you aren’t a first-time buyer, you still won’t be taxed if you’re purchasing a property under £125,000.

Are you thinking about purchasing in Scotland or Wales? Congratulations, you don’t have to pay Stamp Duty either. However, don’t put away the cheque book just yet as you’ll instead be liable for a charge called the Land and Buildings Transaction Tax in Scotland or the Land Transaction Tax in Wales, both of which apply to all purchases over £145,000.

The tax also doesn’t apply to mobile residences such as houseboats or caravans.

In summary, if you:

  • Aren’t a first-time buyer
  • Aren’t buying a property in Scotland or Wales
  • Are buying a property over £125,000
  • Aren’t buying a house that floats or that is on wheels

Then you will be paying some amount of Stamp Duty, with the amount depending on the value of your property.

How is it Paid?

Like many other taxes, Stamp Duty Rates vary wildly depending on the circumstances.

As mentioned earlier, how much you’ll pay will depend on the value of the property that you’re buying. There are several different rate bands, each one meaning that you’ll pay a certain percentage of the property’s value in Stamp Duty:

  • Up to £125,000: 0%
  • £125,001-£250,000: 2%
  • £250,001-£925,000: 5%
  • £925,001-£1.5 million: 10%
  • Over £1.5 million: 12%

There are circumstances where you may not end up paying this amount. For example, if the price of your property is only slightly over one of the Stamp Duty rate bands, then the estate agent or the seller may accept a lower amount. Also, if you divorce your partner, there is no Stamp Duty to pay if you give a portion of your property’s value to them.

To pay it, you will have to submit a Stamp Duty Land Tax return and send off what you owe within 30 days of completing the purchase. Keep in mind that Stamp Duty for a residential leasehold property will be charged differently.

Joint Ownership

If you’re jointly buying a property, then both parties will need to meet the criteria to be exempt from Stamp Duty.

While unmarried people can still be eligible for a reduction in the tax, it will only apply if there’s only one person named on the mortgage deed and that they’re a first-time buyer. Be aware that the maximum saving you can make in this scenario is £5,000 and with only one name on the mortgage application, it will be solely judged on their income which could limit your choices. Also, if you aren’t married and you split up, legally only one of you will have a claim on the property. While it might not be something you want to think about, it’s still a possibility you should keep in mind when it comes to such a large purchase.

Stamp Duty on Second Homes

If you purchase a second home, the tax still applies, and you will have to pay an extra 3% on top of what it would usually be.

If you’re planning on moving, make sure that you’re careful with dates and transactions. If you buy a new principal residence while not having sold your old one, then you will have to pay the higher Stamp Duty rates because you’ll technically be owning two properties. However, if this happens to you, you can be liable for a refund of the extra tax if you sell your previous house within three years of moving into your new home.

Stamp Duty is unavoidable for many, but as long as you’re aware of your circumstances and the amount you’ll be paying for your property, working out how much you’ll owe isn’t too difficult. Plus, there are plenty of free mortgage calculators online that are also capable of working out your Stamp Duty tax.

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