Buying a home unfortunately means coming face to face with stamp duty, one of Britain’s most hated taxes. Having paid out for a deposit, professional fees, estate agent fees and moving costs, this tax charge is an unwelcome payment.
A recent exclusive poll for The Telegraph found that nearly a fifth of voters think it is one of the most unjust taxes, second only to inheritance tax. What you pay depends on whether you’re a first-time buyer, a home-mover or purchasing a second-home or buy-to-let property, and the value of the property you’re buying.
What is stamp duty?
Formally called Stamp Duty And Land Tax in England and Northern Ireland, stamp duty is the tax paid when you buy a property.
It is, even by tax standards, markedly unpopular. The levy is paid in banded thresholds based on a property’s value. You have to pay stamp duty regardless of whether your property is freehold or leasehold, or if you are buying through a shared ownership scheme. You’ll pay a surcharge if you already own another residential property.
Stamp duty © Provided by The Telegraph
Over the past few years, stamp duty has been subject to several changes as successive ministers have used it as a lever to pull up and down in order to support the property market. For example, to encourage house sales to continue during the Covid pandemic, a stamp duty holiday was introduced, which reduced the rate of tax charged on property transactions during 2020 and 2021.
The equivalent tax exists in Scotland as Land and Buildings Transaction Tax (LBTT), and in Wales as Land Transaction Tax (LTT), where rates and thresholds vary.
How much is stamp duty and how is it calculated?
In last year’s mini-Budget, then-Chancellor Kwasi Kwarteng doubled the nil-rate stamp duty band from £125,000 to £250,000 in England and Northern Ireland.
The move saved the average buyer £2,500 in tax on a home purchase, and meant an extra 200,000 would pay no stamp duty whatsoever.
On properties valued between £250,001 to £925,000 buyers pay 5% in stamp duty on the amount over £250,00. This doubles to 10% for values between £925,001 to £1.5m, and rises again to 12% on residences worth over £1.5m.
Buyers purchasing a second home, or buy-to-let property, pay a 3% surcharge on top of the base stamp duty rate.
If you buy a new home to move into before you’ve sold your existing home (due to delays further down the property chain, for example), you’ll pay the second-home surcharge – but you can apply for a refund if you sell your previous main home within 36 months.
Who pays stamp duty?
Stamp duty is paid by nearly all residential property buyers purchasing homes worth more than £250,000.
However, there are exceptions and in recent years successive chancellors have tweaked how the tax operates in response to changing economic and property market conditions.
Stamp duty for first-time buyers
If you are buying your first home, the nil-rate extends up to £425,000, giving younger buyers a chance of getting on to the property ladder without a significant tax charge.
From £425,001 to £625,000, first-time buyers pay 5% of the value of their home over £425,001. First-time buyers purchasing properties over £625,000 won’t receive the relief, and will pay the same stamp duty rates as home movers.
For properties under £625,000, this breaks down as below:
£0-£425,000 – 0%
£425,001-£625,000 – 5%
Stamp duty for shared ownership properties
Anyone buying a shared ownership property can choose to either pay stamp duty in one go, based on the property’s market value, or pay the tax in stages.
If you opt to pay the full stamp duty cost, you pay for the full value of the property despite only buying a portion of it – the remaining portion is usually rented out by a housing association. However, if you decide to buy a larger share of the property later on (known as “staircasing”), then you won’t have any more stamp duty to pay.
If you only pay proportional stamp duty, you’ll then have to pay more each time you want to staircase and increase your share. Some shared ownership homeowners have found the added stamp duty costs have prohibited them from increasing how much they own.
Stamp duty for home movers
If you are simply moving from one home to another, and don’t own two properties at the same time at any point, stamp duty costs will work as below:
£0-£250,000 – 0%
£250,001-£925,000 – 5%
£925,001-£1.5m – 10%
More than £1.5m – 12%
This is also what you’ll pay as a first-time buyer purchasing a property with a value of more than £625,000.
Stamp duty on buy-to-let and second homes
Buying a second home or buy-to-let property will mean handing over more cash to the taxman as you pay an additional 3% in stamp duty, on top of the existing bands.
This includes where other homebuyers would pay 0% – the smallest amount of tax you’ll be charged for a second property is 3%, as below:
£0-£250,000 – 3%
£250,001-£925,000 – 8%
£925,001-£1.5m – 13%
More than £1.5m – 15%
The additional levy does not apply if the home you are buying is your primary residence and your old home has already been sold at the time of purchase.
Furthermore, even if you still own your old home when you buy the new one, selling it within 36 months entitles you to a stamp duty refund. This deadline may be extended if extenuating circumstances mean you could not claim the refund within this timeframe.
Non-residential property stamp duty
Any non-residential or mixed use property bought for over £150,000 is subject to stamp duty. Non-residential property typically means commercial property, or property that isn’t suitable to live in. A mixed property is one that has both residential and non-residential elements, such as a flat with a shop underneath.
For tax purposes, the category also includes six or more residential properties bought in a single transaction.
You also pay stamp duty on agricultural land, even if it comes as part of a residential property, for example a cottage with fields.
You may pay a higher rate of duty for multiple purchases, or transfers from the same seller.
The tax is also calculated differently from residential stamp duty. Two amounts are calculated separately and then added together; the purchase price of the lease and the value of the annual rent you pay.
Stamp duty for non-UK residents
Since 2021, non-UK residents have had to pay a higher rate of stamp duty when purchasing property in England and Northern Ireland.
The additional levy is two percentage points above the rate for UK residents on the given tax band. For example, where a UK resident will pay 5% tax on a property bought for £250,001-£925,000, a non-UK resident will pay 7%.
Overseas buyers also face an additional 2% surcharge on top of the existing 3% tax on second homes and buy-to-let properties.
How to pay stamp duty
Your solicitor should be able to either help you arrange the stamp duty payment, or just make the transaction on your behalf.
If you have a lawyer or conveyancer acting for you, they can submit the stamp duty return online, but if you are managing it yourself it needs to be done via a paper form. You can order the form you need – SDLT1 – online or by calling HMRC.
The Government advises against sending any other correspondence with the form as it may delay the processing.
It is also important to send the form off in good time to allow for postal delays. HMRC recommends allowing three days for the form to reach the department.
When do you have to pay stamp duty?
Stamp duty has to be paid within 14 days of completing a house purchase. If you fail to submit the return and pay within the time frame, you may face penalties from HMRC; the tax authority will charge £100 for returns that are up to three months late, and £200 if the return is later. This is in addition to a tax-based penalty, which varies depending on how much tax is owed and how late the payment is.
This means you need to make sure your budget includes the amount you will owe when working out your total costs for the purchase and move.
You can include stamp duty costs as part of your mortgage borrowing and pay for it that way, but it will incur additional interest.
Stamp duty calculator
Whether you’re just starting out your house buying journey, or you’re already pretty far along in the process, you can use Telegraph Money’s stamp duty calculator to work out how much tax you’ll have to pay.
This can help with your budgeting, giving you one less thing to worry about.