Stamp Duty – What is it and do I have to pay it?

Stamp Duty – What is it and do I have to pay it?

You have found the perfect property to purchase and now find that you are thousands of pounds off ‘budget’ because you haven’t accounted for your stamp duty?

We see this happen almost every day when clients telephone us for a new quote and get completely thrown by the figures they see!

I, therefore, thought it would be a good idea to try and break down what Stamp Duty actually is, who started it all, why you are still paying it and what purpose does it serve, how it has all now evolved and what branches of Stamp Duty Land Tax exist today.

History of Stamp Duty –

Stamp Duty has a long history and it all began in 1694. You will remember from your days at school that William the third (a.k.a William of Orange) and Queen Mary who rallied their troops against the French – William having deposed James the Second in the Glorious Revolution. As we all now know very well, Wars cost money and it was proposed that such monies would be raised by way of a ‘Transaction Tax’. Originally the Transaction Tax was set to last for 4 years but seeing the huge success this new Tax was, this still exists today (almost 4 years after the war!).

The term Stamp Duty was coined on the basis that originally, any records of transactions had to written down using ink and parchment, this document was then submitted to Inland Revue who would check the various transactional records, stamp the documents and return them to the ‘Transferee’  as a record of ‘Good Standing’.

As you would have guessed, the whole process was very tedious and time-consuming and lead to significant errors and delays in relation to any form of Transfer. This original criteria which attracted a ‘Transfer Duty’ were then first refined in 1950 and since has only applied to Property Transactions and some involving ‘Share Sales’.

Though the limiting of Transfer Duty was welcome by the masses (glass half full scenario), this still meant that property transactions, once completed would have taken months to register as conveyancing solicitors still had to submit paper documents enclosing the Transfer/Lease and or Share Certificate where necessary prior to a ‘receipt’ was issued which to this day is a mandatory requirement for Land Registry Purposes.

A further reform was brought about in 2003 where a more convenient ‘Self-Assessment’ approach was brought forward where your Conveyancer is able to prepare and submit a return (electronically) on completion of a property transaction which generates an automatic receipt – making the whole process far more streamlined. It is, however, worth noting that HMRC regularly carries out audits on historical matters and therefore, it is crucial the self-assessment is calculated and prepared correctly as failure to do so might mean that you will encounter nasty surprises in the future. HMRC also reserves the right to recover any outstanding debt which they feel were incorrectly assessed and settled at the time of completion together with any interest accrued + costs.

Current Stamp Duty Rates Explained

Stamp Duty operates works on a sliding scale. Depending on what the purchase price of a property is, where the property is based (we will only discuss Stamp Duty in England and Wales) and the purchaser’s circumstances (are you a first-time buyer, are you purchasing a primary residence or are you a Property Investor), the stamp duty changes.

Stamp Duty for First Time Buyers

As of this fiscal year, Stamp Duty has been abolished for all First Time Buyers. HMRC defines a first-time buyer being an individual (or all individuals purchasing the same property, together) as someone who has never owned or held an interest in a property (say – through inheritance) ever, anywhere in the world. It is also worth noting that there is a reduced liability for purchases up to £500,000.

A stamp duty return is still required to be submitted for all purchases over £40,000 and therefore, though no ‘Stamp Duty’ is payable, this will still attract a professional fee. Technically, HMRC allows a 30-day window from completion of the transaction for the submission of the return, however, if you are using a mortgage lender, it is a requirement that this return is submitted immediately on completion.

Stamp Duty for non-first time buyers

This category applies to a majority of purchasers (if you in the middle of a chain, you will always be non-first buyer) even if you no longer are an owner of a property, but at some point in your life, have held an interest on a property (as an example, you are now divorced, and have sold your marital property). The following table below illustrates the various percentages of stamp duty that must be paid –

Purchase Price Bracket Stamp duty Rate (%)
Up to £125,000.00 0%
£125,001-£250,000 2%
£250,001-£952,000 5%
£925,001-£1.5m 10%
Over £1.5m 12%

Table -1

The above information has been sourced from HMRC’s website and please therefore always primarily rely on their website for the latest information and rates.

Stamp duty for property investors or individuals purchasing a second home

 

This has been the hot topic regarding stamp duty since its introduction in late 2015 and applies to any (and all properties which are not considered your primary residence). The stamp duty rates pose a significant uplift on the total cost of purchasing an investment property – and great care must be taken when it comes to working out finances and setting yourself a budget (especially when you are purchasing at Auction when you might not necessarily be able to quickly evaluate the stamp duty on a moment’s notice).

The Table below illustrates the varying percentage rates which are applicable –

Purchase Price Bracket Stamp duty Rate (%)
Up to £125,000.00 3%
£125,001-£250,000 5%
£250,001-£952,000 8%
£925,001-£1.5m 13%
Over £1.5m 15%

Table – 2

For illustration, let’s look at the following example –

There are 3 purchases, namely Purchaser A, B, and C.

Purchase A is a First Time Buyer

Purchase B is a purchaser (who isn’t a first time buyer)

Purchase C is a property investor (who currently owns a property where he lives in and now purchasing a @Buy-to-Let@ investment property)

There are two residential properties, property Y and Property Z

Property Y costs £250,000

Property Z costs £475,000

Please see the table below illustrating the various stamp duty sums, each buyer will be required to pay (all figures have been calculated using the percentages set out in Table 1 and Table 2 above).

  Property (Y) – £250,000 Property (Z) – £475,000.00
Purchaser (A) £0.00 £8,750.00
Purchaser (B) £2,500.00 £13,750.00
Purchaser (C) £10,000.00 £28,000.00

Table 3

It is, however, worth noting that, the minimum purchase price threshold which triggers a Stamp Duty liability on commercial properties start at £150,000.00. This is particularly of interest to property investors who would otherwise be exposing themselves to a liability from purchase prices above £40,000.00.

If you are purchasing a new property and require a Conveyancer of Property Lawyer to represent you, please contact us on 0800 799 9892 or alternatively, using our online contact form.

 

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