If you’ve spent any time on the UK property market, or even considered entering the market, you’ve probably heard of stamp duty. But what is it exactly, how does it work and how do you pay it? We take a closer look at stamp duty on residential property for home owners.
What is stamp duty?
For starters, its full name is Stamp Duty Land Tax (SDLT) and you have to pay it when you buy property in certain price brackets in the UK. There is a minimum stamp duty threshold, so if your house costs less than the threshold, you are exempt from paying SDLT.
The more your residential property (house or flat) costs, the higher the stamp duty rates. SDLT Rates are calculated as a percentage of the total purchase price (chargeable consideration in real estate parlance).
Current stamp duty rates, according to Gov.uk, break down like this:
- For homes up to £125,000 there is no stamp duty.
- Homes priced from £125,001 to £250,000 pay 1% stamp duty.
- Homes priced from £250,001 to £500,000 pay 3% stamp duty.
- Homes priced from £500,001 to £1 million pay 4% stamp duty.
- Homes priced from £1 million to £2 million pay 5% stamp duty.
- Homes priced at over £2 million pay 7% stamp duty.
Stamp duty is also payable on rent for new leasehold properties, according to HMRC. If the annual rental rate is below £125,000 there is no stamp duty but if it’s over £125,000 then you’ll have to pay stamp duty at 1% of the value in excess of £125,000.
Relief and exemptions
There are certain instances when, even if the purchase price of your property exceeds the minimum threshold, you can avoid paying stamp duty, or when you qualify for relief. For instance, as far as private residential home buyers are concerned, relief is available when more than one property is purchased, as well as when the property concerned is a right to buy transaction. If you’re buying multiple properties, SDLT is calculated by dividing the total purchase price of all properties by the number of properties bought. The bracket in which that amount falls determines the stamp duty rate.
Relief is available in several other instances which don’t necessarily apply to residential home buyers.
Stamp duty exemptions are available for inherited property and property transfers in divorce proceedings or during the dissolution of a civil partnership. In these instances, it’s not even necessary to send an SDLT return to HMRC.
How to pay stamp duty
You will have to send HM Revenue and Customs (HMRC) a Stamp Duty Land Tax return (or Land Transaction Return) as soon as the purchase of your new home has gone through. This form has to be sent even if you qualify for stamp duty exemption. As a rule, you don’t have to negotiate the complexities of a SDLT return, as your solicitor will do it for you. In return for the return, you will get a Stamp Duty Land Tax Certificate, which you need to register your property.
If you do have to complete your own stamp duty return, then the easiest and most convenient way to do so is online (your solicitor can also complete an online form, of course). Online SDLT return forms are available on the HMRC website. The advantage of completing the forms online is that you immediately receive your certificate, so there is no delay in sending it to the land registry.
The SDLT return has to be sent and the stamp duty payment made within 30 days of the completed transaction. Otherwise you will have a hefty fine, and you will be charged interest on the overdue payment.
You can pay online or via phone banking, or the traditional way by visiting your bank or by sending a cheque. You can also add stamp duty to your mortgage, but remember that this will increase the amount you have to borrow, which will increase the interest you have to pay. Consult a mortgage broker or specialist estate agent for advice.
Stamp duty is one of those unavoidable facts of life; we’ll look at why it’s necessary in the UK in another post. In the meantime, don’t forget to include stamp duty in your calculations for your house-buying budget – and don’t sweat it, your solicitor or estate agent will get you through the process unscathed.