Everything You Need To Know About Stamp Duty - MCS

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22nd September 2021

Everything You Need To Know About Stamp Duty

What is Stamp Duty?

Stamp Duty Land Tax (SLDT) is paid to the UK government when purchasing a property in England and Northern Ireland.

There are different versions of Stamp Duty in Scotland (Land and Building Transaction tax) and Wales (Land Transaction tax). These versions of SLDT vary in the threshold before which you pay tax and the percentages that are charged per value of the property.

 

Why do we pay Stamp Duty?

Stamp Duty originated back in 1694 under the reign of William III and Mary II. The tax’s initial purpose was to gather funds for the Nine Years’ War in which a European Coalition (including the UK) were in conflict with France. Items such as newspapers, lottery tickets, gloves and playing cards were embossed with revenue stamps, which demonstrated that the tax applied.

Over time, the variety of products that included stamp duty were reduced. It remained on the exchange of property however. An additional 1% tax was charged on top of the purchase of a property over the value of £60,000. This was changed by Gordon Brown in 1997 when various bands were introduced for higher payments on higher value properties.

In the two decades since this change, the lower and upper thresholds have been altered numerous times in coordination with rapidly changing house prices.

The concept of Stamp Duty Land Tax (SDLT) was established in 2003 in order to change the perspective from a stamp tax instead to a transfer tax charged on land transactions.

 

Recent changes to SLDT

Between 2003 and 2005 there was a large inflation of house prices but not much adjustment to the threshold brackets. This meant the government was receiving an increased amount of revenue from the tax.

Subsequent changes were made in the threshold brackets after this point until 2008. On the 2nd September 2008, the threshold for paying SLDT was raised from £125,000 to £175,000 for a year. This was considered a ‘stamp duty holiday.’ The holiday was extended until the end of 2009 in order to accommodate for property purchase during the recession.

A stamp duty holiday was not used again until the 8th July 2020 as an impact of the COVID-19 pandemic. Stamp duty was not charged on any properties under the price of £500,000 until the 30th June 2021. From the 1st July to 30th September 2021, this amount was reduced to £250,000. After the 1st October 2021, the nil rate will return to its current standard amount of £125,000.

 

How much Stamp Duty will I pay?

The answer to this question will be answered depending on how soon your transaction is due to complete. Any Stamp Duty paid before the 30th September will be subject to the stamp duty holiday. Payments after this date will be instead subject to the typical rates.

 

Tax band thresholds between 1st July 2021 and 30th September 2021

Purchase Price Band (£)                                                                 Rate (%)

Up to £250,000                                                                                  0%

The next £675,000 (£250,001 to £925,000)                               5%

The next £575,000(£925,001 to £1.5 million)                            10%

The remaining amount (Above £1.5 million)                              12%

 

Example: Property priced £275,000

0% SDLT charged on the first £250,000

5% charged on the remaining £25,000

Total SDLT = £1250

 

From 1st October 2021 (in conjunction with rates prior to 8th July 2020)

Purchase Price Bands (£)                                                               Rate (%)

Up to £125,000                                                                                  0%

For the next £125,000 (£125,001 to £250,00)                            2%

The next £675,000 (£250,001 to £925,0000)                            5%

For the next £575,000 (£925,001 to £1.5 million)                     10%

The remaining amount (Above £1.5 million)                              12%

 

Example: Property Priced £275,000

0% on the first £125,000

2% on the next £125,000 = £2500

5% on the final £25,000 = £1250

Total SDLT = £3750

 

How to pay Stamp Duty

HMRC must be notified about property transaction within England and Northern Ireland within 14 days. The return must be completed even if you don’t own any tax.

Typically, when working with a conveyancing solicitor, they will make the stamp duty payment for you after completion. This process can be completed online on your behalf. If you are not represented by a solicitor, you must complete a SDLT1 paper return.

Paying Stamp Duty independently

An SDLT1 is used for simple, straightforward transactions, usually a simple residence transaction. There are alternative versions of this form. For example, the SDLT2 is used when there are more than 2 buyers or sellers. An SDLT3 is used when the transaction involves more than one property. Finally, an SDLT4 is for more complication leases as well as commercial transactions. This form is only used for certain residential transactions depending on certain circumstances.

If completing these forms, yourself, make sure you fully understand which is the correct one for your circumstances. If any mistakes are included in your form, HMRC will send you an SDLT8 asking for correct or missing information. An SDLT5 is then issued for correctly completed returns with the amount payable. This certificate then needs to be submitted to HM Land Registry so the transaction can be registered.

There can be consequences if this process isn’t completed. There is an automatic fixed penalty if the transaction is not filed before the filing date. The amount you pay is dependent on how late you file your return.

  • There is a penalty of £100 if you file your return up to 3 months after the filing date
  • This increases to £200 if filed after 3 months after the filing date.

Interest is also charged on the SDLT amount up until it is paid. This will increase up until the point that you pay it. Should you file your return late, HMRC will write to you and your agent to notify you of an underpayment and the amount of interest you have accrued so far. This amount should be paid as soon as possible.

 

Stamp Duty on Second Homes

Introduced in April 2016, purchasing a second property to your main residence requires additional payment of SLDT. Typically, this additional payment is an extra 3% to the typical tax payment brackets.

Purchase Price Band (£)                 Tax (%)

£0 – £500,000                                      3%

£500,001 – £925,000                         8%

£925,001 – £1.5 million                     13%

Over £1.5 million                                15%

 

This payment applies to any additional properties valued over £40,000. This may apply to buy-to-let properties, holiday homes or a second main residences. However, it does not apply to houseboats, caravans or mobile homes.

The additional payment also applies if you already own another property somewhere else in the world. For example, you may own a property in another country that you will use as a secondary residence whilst purchasing a main residence in the UK. On this purchase you must include the additional 3% tax payment for the additional property.

There is an exception for the charge when buying a main residence and then later selling the previous one. When purchasing another main residence, you will likely have to pay the 3% surcharge. However, so long as you sell your previous property within 36 months of completing your most recent purchase, you may be able to claim a refund for the overpayment of stamp duty. This can be completed online or via the post. The refund should then be processed 15 days after being received, but can take longer. For successful refund applications, the amount should be BACS transferred to you.

 

Reliefs and Exemptions

There are certain buyers that are eligible for Stamp Duty Land Tax relief. This will either reduce the amount of stamp duty you must pay, or allows you an exemption.

 

First Time Buyers

From 2017, it was introduced that there would be a stamp duty relief for first time buyers. This applies for any property purchased after 22nd November 2017. The value of eligible properties must be under £500,000 and used as the sole residence for first time buyers.

The relief drastically adjusts the thresholds for the price of property. For properties valued up to £300,000 or less, no stamp duty is paid. After £300,000 up to £500,000, 5% tax is paid on the additional amount above £300,000.

Properties priced over £500,000 do not benefit from any of the relief. Purchasers must pay the standard costs for SDLT.

Who is considered a first-time buyer?

In order to receive the relief, it must be confirmed that the purchaser meets the requirements for the definition of First-Time Buyer. In the eyes of the UK government, an individual is a first-time buyer when the purchaser has never been the owner of major interest in a property anywhere in the world. This includes the inheritance or gifting of property as well as holding any number of shares in a property.

The purpose of this relief is to make the purchase of property more accessible to first-time buyers. Stamp Duty is an additional cost that can delay the purchase process as buyers have to save for a longer period of time. Property owners that are selling one property and purchasing another often use the finances that are tied to their previous property to finance their future deposits and stamp duty costs.

The relief reduces the costs for first time buyers to allows them a faster purchase period. This is useful for getting on the property market and prevents the need to accumulate several thousands of pounds for this cost.

 

There are a number of other circumstances which allow for consideration of relief. These can include:

  • Multiple dwellings

If more than one property is purchased by a buyer during one transaction, some relief can be claimed. To claim relief, there is a calculation that can be made to determine the amount of tax to be paid.

The total amount to be paid for the properties should be divided by the number of dwellings. Then calculate the total SDLT amount that would be paid on this figure. Finally, multiply this amount of tax by the number of dwellings.

Example: You purchase three properties for £600,000

£600,000 divided by 3 is £200,000

The amount of SDLT paid on £1500

£1500 multiplied by 3 is £4500.

There is an exception that states the minimum amount of tax paid is at least 1% of the total amount paid for all dwellings.

As the amount calculated is below 1% of the total amount, SDLT paid is £6000.

Most often this relief applied for purchasing blocks of flats or several dwellings at a time. The relief does not apply to those purchasing a single property.

  • Building company purchases an individual’s home

When an individual purchases a property from a building company, the building company can purchase their previous home from the individual. This property can be exempt from SDLT if certain conditions are met.  Information on these exemptions can be found on the gov.uk website.

  • Employer purchase an employee’s property

In the case than an employee relocates for work, the employer can purchase their property with an exemption of SDLT. There are conditions for this relief that include the length of time the employee had used the dwelling as their main residence as well as conditions of the purchase. More information can be found on the gov.uk website.

  • Compulsory Purchases

A transaction can occur between a homeowner, the local authority and a property developer. The owner of a property might sell their property to the local authority, who then sell it to the property developer. 2 sales would typically mean two amounts of stamp duty to be paid. However, the local authority can get relief if the property developer goes through with the development.

There are several other forms of relief that can be received by numerous organisations, developers and owners when purchasing a property under certain circumstances. However, during property transaction, first time buyers are typically the only typical property purchaser who receive relief. For more information regarding all types of SDLT relief available find more information from the UK government.

There are also certain situations in which you do not have to pay any SDLT or even file a return for. This occur when you acquire the property without purchase and you do not need to alert HMRC of the transaction.

  • The property of land changes hands without exchange of payment.
  • A property is inherited by being left to you in a will.
  • Divorce or dissolution of civil partnership subsequently leads to the transfer of property to your ownership.
  • You purchase a lease of 7 years of more with a premium less than £40,000 and rent less than £1000
  • Alternative property financial arrangements are used within the transaction that can include secondary transaction. This can often be to comply with Sharia Law where paying interest is illegal.

 

Land Transaction Tax (LLT) – Wales

Land Transaction Tax replaced SDLT from April 2018. The amount is collected by the Welsh Revenue Authority to be managed for the Welsh Government.

LTT differs from Stamp Duty Land Tax as there are different thresholds for payments on properties in Wales.

 

Property Price Bands (£)                LTT rate (%)

Up to £180,000                                  0%

£180,000 to £250,000                     3.5%

£250,000 to £400,000                     5%

£400,000 to £750,000                     7.5%

£750,000 to £1.5 million                10%

Over £1.5 million                              12%

 

Example: Property Priced £275,000

0% on the first £180,000

3.5% on the next £70,000 = £2450

5% on the next £25,000 = £1250

Total LLT = £3700

 

The amount of LLT you pay differs based on whether your property is residential, non-residential, your main residence or second property. There is also no relief for First Time Buyers in Wales. However, similar relief can be received for multiple dwellings.

Land and Buildings Transaction Tax (LBTT) – Scotland

The system is broadly based on the SDLT system used in England and Northern Ireland. The rates increase in line with property prices. The taxation rates are different to the rest of the UK.

 

Property Price Band (£)                  LBTT rate (%)

Less than £145,000                           0%

£145,000 – £250,000                        2%

£250,000 – £325,000                        5%

£325,000 – £750,000                        10%

Over £750,000                                    12%

 

Example: Property Priced £275,000

0% tax up to the first £145,000

2% on the next £105,000 = £2100

5% on the next £2500 = £1250

Total LBTT = £3350

 

Scotland does allow First Time Buyers to benefit from a relief, however this is not as lenient as the amount in England. Instead, first time buyers are offered slightly higher thresholds. The typically minimum threshold to pay LBTT is £145,000. For first time buyers, this amount is instead £175,000. After this point the bands and tax amounts remain the same. No tax is paid before £175,000.

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