Stamp Duty Guide
When it comes to buying a home, Stamp Duty is an integral part of the process. We have created a guide explaining what Stamp Duty is and how it works.
There is plenty of information to process when you purchase a property, and the biggest expense is Stamp Duty. The amount you pay can depend on the circumstances, but this guide will show how you can calculate the amount you have to pay.
What is it?
It is a property tax that you pay when you buy land or property. It is also known as Stamp Duty Land Tax, the Duty applies to those that are purchasing properties above a certain amount in England and Northern Ireland. Wales and Scotland have their versions of Stamp Duty, but the basics are the same. What you have to pay, is dependent on the value and purpose of the property that you are looking to purchase. It also takes into consideration the type of buyer you may be. If you are a previous homeowner, landlord, or first-time buyer, this can all make a difference. There are some misconceptions around Stamp Duty and it is important to highlight and dispel these notions. Some key facts to remember:
- The property buyer is the one that pays the Duty. If you are selling, you never have to pay Stamp Duty.
- Stamp Duty cannot be deducted from Income Tax, even if you are buying to let. Having said that, you can take it from your taxable gains so you can reduce the amount you have to pay in Capital Gains Tax when you sell.
- There is no VAT to pay on Stamp Duty, it has its rates applied.
How and when do you pay Stamp Duty?
When you buy land or property is when you have to pay the Stamp Duty. The HMRC requires that you pay the Stamp Duty no later than 30 days after completion. When you pay Stamp Duty, you just need to fill out a Stamp Duty Land Tax return and send it on to HRMC. Usually, you will find that your solicitor handles this process for you and sends the fee to HMRC following completion.
Why do you have to pay Stamp Duty?
Of course, purchasing a property is an expensive enterprise and it can be a little dispiriting having to pay out for extra costs like Stamp Duty Tax.
Originally, Stamp Duty Tax was paid to cover costs for the legal documents that were needed when a property was purchased. Before this kind of process went digital, the Government would physically stamp their approval upon the paperwork.
Presently, Stamp Duty is more than what is needed for the cost of the documents. It is understood that the Government uses Stampy Duty Land Tax as a way of procuring revenue.
One example of the kind of document you would need is what is known as a Certificate of Land Ownership. This document will officially transfer ownership from the previous owner to you. HMRC only issue this document when the Stamp Duty is paid.
Who has to pay?
Anyone, who is buying a property over a certain amount, will have to pay Stamp Duty. There are notable exceptions however if you qualify, this depends on what type of buyer you may be. You need to pay Stamp Duty if:
- You have brought a property or land that is more than £125,000.
- You have purchased a new home to replace your last home.
- You already owned land or property but since then you have sold it, and you now live with family or friends, or rent, and are going to buy a new property.
- You have married, and your partner and you purchase a property, even though one is buying for the first time.
- A first-time buyer that is buying a property more than £500,000.
- Buying a shared ownership property.
- Purchased a non-residential property with a value of more than £150,000.
- Buying a mixed-use property or land worth more than £150,000.
- You have been added to a title deed or mortgage deed. This technically counts as buying a share of land or property.
You would also need to pay a surcharge if:
- You buy a second home.
- You are a landlord and you buy a property to let
- You buy a buy-to-let via a company.
Any exemptions or relief
Those that are exempt from paying Stamp Duty include:
- First-time buyers, buying for less than £300,000.
- Anyone that receives property or land in exchange for payment, such as divorce.
- Property that is left in a will. Rather than paying Stamp Duty, you would need to pay Inheritance Tax.
- Anyone that buys a freehold property that is £40,000 or less.
- Brought an assigned or new lease for a minimum of 7 years. The premium would need to be £40,000 or less, and the yearly rent would need to be less than £1,000.
- Purchased an assigned or new lease of 7 years or less.
There are also relief options available for the following:
- Any first-time buyers buying a property that is valued up to £500,000.
- Anyone that is buying multiple properties, where there are linked transactions that include leasehold or freehold interests.
- Any situation where a company purchases an individual’s property and the person purchases a property from the company.
- Employers who buy an employee’s home for work.
- A forced purchase, an example is if a council buys a property to sell on to developers.
- A transfer of property or land between two companies.
- A charity that buys property or land for a charitable purpose.
- A right to buy property, where the property is sold at a discounted rate by a body in the public sector.
The rates explained
You will pay Stamp Duty at the standard rates, explained below:
Property Value: up to £125,000 | SDLT Rate 2019 – 2020: 0%
Property Value: £125,001 – £250,000 | SDLT Rate: 2%
Property Value: £250,001 – £925,000 | SDLT Rate: 5%
Property Value: £925,001 – £1,500,000 | SDLT Rate: 10%
Property Value: from £1,500,001 | SDLT Rate: 12%
If you buy a second home or purchase a buy to let, you will pay a 3% surcharge on top of the normal Stamp Duty rate.
If you are a first-time buyer, who is buying the main home, you will be able to claim the full amount of Stamp Duty relief on any properties £300,000 or less. You will also be eligible for some Stamp Duty relief on any that is between £300,000 and £500,000.
Property Value: up to £300,000 | SDLT Rate for First-Time Buyers 2019 – 2020: 0%
Property Value: £300,001 – £500,000 | 5%
Can I add stamp duty to the mortgage?
People find it difficult to save their deposit, without thinking about Stamp Duty. There are a number of options in this case. One of those is to add the Stamp Duty to your mortgage.
It is possible to add the amount you need to cover Stamp Duty when you take out your mortgage. You just need to add the Stamp Duty onto the amount you want to borrow.
There are consequences of adding Stamp Duty to a mortgage such as:
- You will have to pay the interest on what you borrow for the duration of the mortgage
- If you borrow more money this could affect the loan-to-value ratio (LTV). This could prevent you from getting the best deals.
- You can add Stamp Duty and can have a discussion about this with your adviser. We’ll explain how it could affect the mortgage deal and how it could affect the monthly payments.
Do you pay on shared ownership properties?
You would still need to pay on a shared ownership property, even if you only buy a portion.
Do you pay on new builds?
Despite what many people think, you still have to pay Stamp Duty on new build properties.
Can you avoid stamp duty?
Stamp Duty Tax is a tax you need to pay. Unless you are able to qualify for any exemptions. Trying to avoid paying Stamp Duty can lead to charges and penalties for failure to pay.
At Orchard Mortgage Solutions we are always on hand to go through the details of Stamp Duty Tax with you and provide specialist advice.