If you are purchasing a property that is valued at over £125,000, you are going to be liable for Stamp Duty. Whether you’re a first time buyer, moving up the property ladder or buying an investment property, it’s important to understand what Stamp Duty is all about, and how it will apply to you.
What exactly is Stamp Duty?
Stamp Duty is the shortened version of ‘Stamp Duty Land Tax’, which is a tax that everyone who purchases a house over £125,000 pays; whether they are buying it outright or using a mortgage agreement. The tax applies to both freehold and leasehold properties in England, Wales and Northern Ireland. In Scotland it is called Land and Buildings Transaction Tax, and works a little differently. If you are buying a home in Scotland, you can find out more here.
How much does Stamp Duty cost?
Stamp Duty is calculated as a percentage of the overall purchase price. If your home is worth under £125,000 then the percentage is zero, so you don’t have to think about it at all. For homes in the range of £125,001 to £250,000, Stamp Duty is 2 per cent of the property price, applied to the value over and above £125,000.
As the cost of the home increases, so does Stamp Duty. For £250,001 to £925,000 it goes up to five per cent, and between £925,001 and £1.5 million it is 10 per cent. Anything over £1.5 million is taxed at 12 per cent. As an example, if you buy a home for £175,000, you will be liable for £1,000 worth of Stamp Duty (2 per cent of the amount over £125,000 = £50,000).
For anyone buying a property in Surrey or Hampshire it is likely that Stamp Duty will be a factor in that purchase.
How do you pay Stamp Duty?
As soon as you have purchased your home, you need to submit a Stamp Duty Land Tax return. You will need to work out what you owe and make a payment for this amount within 30 days. Even if your home is under the taxable band, i.e. less than £125,000, you still need to send back the tax return form, although you won’t need to make any payment.
Quite often, your solicitor who is handling the paperwork for the house purchase will take care of the forms and payment on your behalf. However, it is you who is responsible for staying within the law, so do check they are undertaking this as you could be subject to a £100 fine plus interest if you do not pay in time.
When is Stamp Duty not applicable?
There are certain times when property may change hands but Stamp Duty is not payable. For example:
- During a separation or divorce
- If a house is given to you as a gift
- If a property is left to you in a will
In most other situations, including if you exchange homes with another person with no cash changing hands, you are still liable for Stamp Duty. If you are at all unsure about whether Stamp Duty applies to you or not, consult a financial specialist for advice.
Second Homes And Buy-To-Let Properties
From April this year (2016) the government introduced a new, higher rate of Stamp Duty for those buying second homes or buy-to-let properties. Any homes which are purchased but are not going to be the person’s main or only residence are subject to an additional 3 per cent Stamp Duty Land Tax. Only caravans, houseboats and homes valued at less than £40,000 are exempt from this new level of tax.
If you are planning to buy a property and rent it out, if you are looking to buy a house for your children to live in, or even if you are looking for a holiday cottage in the countryside, it is important to bear this new tax in mind. That home worth £175,000 which would raise £1,000 Stamp Duty for a private buyer would leave a landlord or second home owner with a bill for £6,250, which could come as a nasty surprise if you were not expecting it.
And here’s the kicker. If you haven’t yet sold your old home when the sale completes on your new property, you are, in theory, a second home owner. That means you will be liable to pay your Stamp Duty at the higher rate, at least until your old house sells. Once it is sold, you can apply for a refund, but there has been no guidance published as yet to indicate how long this could take.
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