Stamp Duty 101: Everything you need to know
When it comes to buying a home, there are a lot of expenses you need to take into consideration. Stamp Duty, or Stamp Duty Land Tax (SDLT) in official terms, is one of these expenses. First thing to note is that it is always the home buyer who pays stamp duty, not the seller. Usually, you will transfer funds to your solicitor who will then pay it on your behalf as part of the purchase process.
What is it?
SDLT is a tax on documents which is generally required to make a document legally enforceable. You must pay Stamp Duty Land Tax (SDLT) to HMRC if you buy a property or land over a certain price in England and Northern Ireland, and the value of this depends on the value of the property in question. Different rules apply to Wales and Scotland.
Stamp Duty is payable on freehold or leasehold properties and is applied whether you’re buying outright or with a mortgage.
How much is it?
Stamp Duty is calculated based on the value of the home, not the amount that you borrow through a mortgage. There is a framework laid out by HMRC to identify different thresholds where SDLT rates apply. Naturally, if you buy a property for less than the minimum threshold, there’s no SDLT to pay.
Chancellor Kwasi Kwarteng cut stamp duty in the September 2022 mini-budget. The current SDLT minimum thresholds are:
- £250,000 for residential properties
- £425,000 for first-time buyers buying a residential property worth £625,000 or less
- £150,000 for non-residential land and properties
In terms of what you are expected to pay, the figures now look like this:
- Nothing on the first £250,000
- 5% between £250,001-£925,000
- 10% between £925,001 and £1.5 million
- 12% above £1.5 million
For example, a property purchased at £300,000 would be liable for 5% stamp duty on £50,000 (because it’s £50,000 over the £250,000 threshold). Nothing is payable on the first £250,000. So the total amount of Stamp Duty payable is £2,500.
A higher rate of stamp duty applies to purchases in situations where the purchaser already owns a residential property, which is their main home. Stamp duty on a second home or buy-to-let property costs an additional 3% on the standard stamp duty rates.
This higher rate also applies to any delay in selling a previous residence. Yyou will still be liable to pay higher Stamp Duty rates for additional properties because you will effectively own two properties. If this situation arises, you can apply to claim a refund for the 3% surcharge by completing a stamp duty land tax return online.
When do you have to pay?
Once you’ve bought your new home, you’ll need to file a stamp duty land tax return and pay the amount due within 14 days in England and Northern Ireland. It is common that your solicitor will sort this out for you, but it’s ultimately your responsibility, so if you don’t do this within 14 days, you’ll be charged penalty fees of £100, plus interest, by HMRC.
Are there any exemptions?
The most common example of a stamp duty exemption is when the property is bought for a price that’s lower than the stamp duty threshold. Other examples include when the deeds to a property have been transferred in a divorce or in an inheritance through someone’s will.
Other stamp duty exceptions include:
- Homes valued over £500,000 that are registered to companies instead of individuals. These have a stamp duty rate of 15%.
- Charities that buy land and property exclusively for the needs of the organisation may be able to get relief from stamp duty.
- Right-to-Buy transactions may qualify for discounts but are considered on a case-by-case basis.
- Registered social landlords that purchase land or property may be able to get relief from stamp duty but will be case specific.
- Zero-carbon homes (including flats) valued under £500,000 are exempt but those worth over £500,000 receive a reduction of £15,000 on their bill.
You can see an extended list of stamp duty exemptions and reliefs here.
Other points to consider
You can add your stamp duty payment to your mortgage if you’re unable to pay up front, but it’s not without consequence because it will incur interest charges. Also, adding your stamp duty to your mortgage could mean you end up with a higher interest rate if it increases your loan-to-value up substantially.
For example, a mortgage that is over a 30-year term, will incur a significant interest charge over this period, so it’s always cheaper in the long run to pay it straight away if you can.
If you need to borrow more on your mortgage to cover the tax bill, you’ll need to calculate how much stamp duty you will owe and increase your mortgage borrowing to cover it. There are a number of stamp duty calculators online to help with this, but the HMRC has a lot of information available surrounding stamp duty that will help you make a decision when considering your options.