February 18, 2022
For many buyers, especially first time buyers, a common question when starting the home buying process is ‘What is stamp duty?’
When buying a house in the UK, it’s likely that you’ll come across terminology that is specific to the property market. Stamp duty is one of those. And if you’re not familiar with what this is, then it’s vital you read up on it and calculate how much you’ll need to pay.
But, where do you start? Don’t worry, we’ve got you covered. We’ve condensed all of the information you need into this handy guide. Let’s get into it.
Stamp duty is a tax you’re required to pay in England and Northern Ireland when buying property or land over a certain value (Wales and Scotland have a similar tax, but has a different name). This fee must be paid in one lump sum and is an added expenditure on top of the price of your home and other ancillary costs.
Stamp duty has been around for a very long time. It was in fact first introduced in 1694 by William III and Mary II and applied to a host of products. It gets its name from the fact that a physical stamp was used on documents as proof that tax has been paid.
Officially known as Stamp Duty Land Tax (SDLT) in England and Northern Ireland, this updated tax system was introduced in 2003 to replace the older stamp duty system. Stamp duty now specifically refers to the tax applied to property purchases. It is also known as the Land Transaction Tax (LTT) in Wales and the Land and Buildings Tax (LBTT) in Scotland. (But, more on them later).
Depending on criteria, many home and land buyers will be required to pay the Stamp Duty Land Tax to the UK Government. The fee applies to both freehold and leasehold purchases and is applicable to both home buyers that are using a mortgage lender or have paid outright.
You’re required to pay the stamp duty tax within 14 days of purchasing your land or property. It has to come from your own funds and can’t be part of your mortgage agreement. The majority of buyers will use a conveyancer to complete the tax payment for them in the required time frame.
It’s not uncommon for Chancellors to apply a “stamp duty holiday” during periods of economic uncertainty, in a bid to stimulate the housing market. During these periods, thresholds and limits are increased, which reduces the stamp duty that buyers are required to pay.
In July 2020, Chancellor Rishi Sunak revealed that he was introducing a stamp duty holiday, given the economic uncertainty caused by the COVID-19 pandemic. Under this policy, home buyers paid no stamp duty on the first £500,000 on purchases completed before 30th June 2021. The stamp duty holiday then tapered until 1st October 2021, when it reverted to pre-pandemic amounts.
Now, let’s get down to the figures. Non-first time buyers are required to pay stamp duty on property purchases above £125,000. First-time buyers pay less - more on that in the next section.
The total amount you’ll need to pay depends on the purchase price. Here’s a breakdown of how stamp duty is calculated.
So for example, if you’re purchasing a property in England that is worth £300,000 and you’re not a first-time buyer, you will be required to pay £5,000 in stamp duty. This is calculated as follows:
Total: £5,000 to be paid within 14 days
To quickly and easily calculate how much stamp duty you’re required to pay on a house purchase, use this stamp duty calculator provided by this Government website.
If you’re a first time buyer, the good news is that you pay less stamp duty than everyone else (as long as the property costs less than £500,000).
In 2017, the UK government confirmed that there would be a stamp duty relief for first time buyers across England and Northern Ireland. Currently, if you are a first-time buyer in these parts of the UK, you are exempt from paying stamp duty on the first £300,000 of a property transaction.
The stamp duty rates for first time buyers breaks down as follows:
So for example, let’s say you’re a first time buyer and you’ve purchased a house for £350,000. Your stamp duty cost would breakdown as follows:
Total: £2,500 to be paid within 14 days
If you’re a first time buyer purchasing a property above £500,000, it’s important to understand that you’re not eligible for any first time buyer stamp duty relief, and your stamp duty will be calculated at the standard rate.
As of 2021, the average price of a house in England came in at £271,434. While this amount varies massively depending on location, it means that many first time buyers won’t have to pay any stamp duty on their first home.
As well as having access to stamp duty relief, there are also several financing options available that were created to support people trying to get onto the housing ladder. People saving via the Lifetime Individual Savings Account (also known as LISA) and the Help To Buy ISA (which ended in 2019) will receive a 25% bonus from the government that you can put toward buying your first property.
There are also a range of government-backed schemes that are available to further help first time buyers to get onto the property ladder.
Typically, your conveyancer will facilitate the stamp duty payment to HMRC on your behalf, as part of the conveyancing process. This must be paid within 14 days of exchanging contracts.
Once the contracts have been exchanged and the sale of a house has reached completion, you will be expected to transfer the funds to your conveyancer (or other legal representative). They will then pay the stamp duty for you within the required time frame. If you’re a first time buyer, your conveyancer will usually claim relief on your behalf on the SDLT.
If your conveyancer isn’t doing this on your behalf, then be mindful that you’ll be subject to penalty charges if payment is not received by HMRC within the 14 day window.
If payment fails to go through, HMRC will send you a written warning which informs you of the amount of interest you have been charged. What’s more, the interest is considered compensation to HMRC and home buyers can’t appeal against the late payment interest charges. So, it’s certainly in your interest to get everything completed on time.
No. You cannot pay stamp duty in installments. Nor can you pay via credit card, as HMRC banned the use of credit cards for stamp duty payments in 2018. Also, the cost can’t be included within a mortgage.
If you live in England or Northern Ireland, stamp duty rules are the same. However, if you are a resident of Scotland or Wales, the tax on buying a property goes by different names and has different rules and rates.
Scotland voted to abolish stamp duty in 2012 and has since replaced the property tax with the Land & Buildings Transaction Tax (LBTT).
Like stamp duty, the Land & Buildings Transaction Tax applies to both residential and non-residential properties and land. The key difference between the two taxes is that Scottish home buyers will pay 0% LBTT on anything up to £145,000. First-time buyers have a tax relief of up to £175,000. A breakdown of the LBTT can be found here.
In 2018, the Welsh government replaced the SDLT with the Land Transaction Tax (LTT). This payment is managed by the Welsh authorities and applies to all properties bought in Wales.
Here, the threshold for paying the LTT is £180,000 for residential homes and £225,000 for non-residential buildings and land. Similar to rates in Scotland, England, and NI, these fees change for those that are buying a second property for example. However, unfortunately, there is no first-time buyers relief under the Land Transaction Tax programme.
Further information about the Welsh property tax can be found here.
Here’s a breakdown of how property purchase taxes compare throughout the UK.
If you’re buying a second home or a buy-to-let property in England or Northern Ireland, you’ll be required to pay a stamp duty surcharge of 3% above the standard rates.
This breaks down as follows:
However, you will be exempt from paying stamp duty on a buy-to-let or second home if it costs less than £40,000.
Pro Tip: If you have bought a home to live in, but the process of selling your previous home is delayed for some reason, you might technically be considered a homeowner of two properties during this intervening period. If this is the case, you will be required to pay the higher stamp duty rate on the property you have purchased.
However, there is a concession for those that sell their previous home within three years. You can apply online to access a refund for the 3% tax you paid once your previous home is sold. What’s more, the refund is also available for some people who failed to sell their previous home within three years if there are exceptional circumstances.
As of April 2021, non-UK residents are required to pay a 2% surcharge on their stamp duty payment when buying a property in the country. This policy was introduced in an effort to curb price inflation in locations (such as London and the south east) where many property purchases are being made by overseas buyers.
Also - if an overseas buyer is purchasing a property as a second home, or a buy-to--let investment, they will also be required to pay the 3% second home surcharge. This means that under this scenario, their total stamp duty surcharge is 5%.
This breaks down as follows:
Home buyers are asked to complete an SDLT residency test to determine if they are deemed non-UK residents that must pay the higher stamp duty rate.
For many, stamp duty can make a huge dent in your finances. As a result, buyers may be wondering if there are any ways to avoid a stamp duty payment on their new home? The short answer is no.
However, while there are no avenues to avoid this tax liability, there are several things you can do to lessen the amount of stamp duty you’re required to pay.
What’s more, if you are looking into a new build it is also possible to ask the property developers if they might cover the cost of your stamp duty. There’s certainly no harm in asking!
As you can see, stamp duty is somewhat complex. The amount you’re expected to pay will vary greatly depending upon where you live in the UK and whether you are a first time buyer. And, while you can’t necessarily avoid it, there are some ways to lessen the amount if you are a little bit creative.
A conveyancer will usually do the heavy lifting and provide you with all the relevant information about whether you need to make a stamp duty payment as well as a calculation of the final cost. As a potential home buyer, it’s in your interest to plan ahead and be prepared to make this payment when the time comes around. You could say, it’s your duty.