A guide to stamp duty for first-time buyers

All homes bought in either England or Northern Ireland that cost more than £125,000 come with an additional Stamp Duty tax. If you’re purchasing your first home in the UK, you are afforded greater leniency in taxation with properties up to £300,000. Nevertheless, new homeowners must still wrap their heads around the basic costs involved in Stamp Duty and how it’s paid. Here we look at everything you need to know about Stamp Duty Land Tax (SDLT).

Stamp Duty in a Nutshell

Simply put, a Stamp Duty is a tax levied on paperwork and documents, which once involved a physical stamp to be impressed upon the document to denote payment. With the UK’s Stamp Duty Land Tax (SDLT), it is applied to all land transactions in the form of a transfer tax. Most buyers of residential property and land are liable to pay a Stamp Duty tax, providing the cost of the home/land is more than £125,000 (or £300,000 for new homeowners). For second homeowners, this is reduced further to £40,000. Although the rules are the same in both Northern Ireland and England, Scotland has its own Land and Buildings Transaction Tax (LBTT) and Wales has a Land Transaction Tax (LTT), both of which operate similarly but with their own unique rules and payment caps.

How much does Stamp Duty cost?

Stamp Duty is divided into different percentage rates, dependent on the price of the property. For properties purchased at between £0 – £125,000, no Stamp Duty is applicable. For properties between £125,001 – £250,000, Stamp Duty is set at 2% of the house value. For properties between £250,0001 – £925,000, Stamp Duty is 5%. Properties between £925,001 – £1.5 million incur a Stamp Duty of 10% and all properties exceeding £1.5 million in value incur a 12% transaction tax.

However, the tax is calculated based on each part of the property’s purchase price in relation to the percentage band, rather than an outright percentage. For instance, a property costing £275,000 will incur a 0% Stamp Duty on the first value of £125,000, 2% on the next £125,000 (equalling £2,500) and 5% on the final £25,000 value (equalling £1,250). This gives a total Stamp Duty of £3,750, rather than 5% of the total value. However, first-time buyers do not have to pay Stamp Duty on properties up to £300,000.

First-time buyers and Stamp Duty relief

First-time buyers receive relief on properties up to £300,000, meaning that you can save upwards of £5,000 on your first home. What’s more, for any property which costs up to £500,000, first-time buyers do not pay Stamp Duty on the first £300,000 and only pay for the remaining £200,000. If your first-home costs more than £500,000, standard Stamp Duty rates apply. A new law was also introduced in 2018 to allow buyers utilising shared owner schemes a relief on properties up to £500,000.

How does Stamp Duty work on second homes?

Although first-time owners are not applicable here, it’s important to note that second homes incur additional taxation. Whether someone is purchasing a second home or buy-to-let property, you will need to pay an additional 3% on top of each band. This applies to all properties purchased at over £40,000. This does not apply to moveable and non-land-based dwellings like mobile homes, caravans or houseboats.

When you are purchasing a second home with the intent of also selling your former residence, you will still have to pay the additional Stamp Duty so long as you own both properties. However, once one of your properties is either sold or given away, you can claim a Stamp Duty refund within 3 years of purchase. This refunds the buyer the additional 3% rate applied to second homes.

How is Stamp Duty paid?

Stamp Duty is often dealt with by your solicitor, although any home buyer can return and pay Stamp Duty themselves. It is worth noting that a return must still be submitted on homes which incur no Stamp Duty, such as homes costing under £125,000 or for first-time homeowners with a property under £300,000.

Owners have up to 14 days to file their Stamp Duty return and pay the total fee. The 14-day period begins on the date of the transaction. If Stamp Duty is not returned within 30 days, you may be charged additional penalties and interest fees by HMRC.

Additional circumstances

There are some additional circumstances where you won’t have to pay Stamp Duty. These include the transfer of a property or land following a divorce/separation. If a portion of the home’s value is transferred in a divorce, there’s no Stamp Duty charged. Stamp Duty is also not charged in a transfer of deeds, either when a home is given to another party in a will or as a gift.

Utilising tools

There are many useful tools on the internet to calculate Stamp Duty Land Tax, avoiding headaches on your part. The Money Advice Service in particular has an easy-to-use tool.

Be sure to ask your solicitor about any relief and, when purchasing homes which just exceed the first-time homeowner price band, see if your estate agent will accept a lower offer to help avoid the tax.

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