STAMP Duty is a fee you pay the taxman depending on the value of the property you are purchasing.
It is a transaction tax (the long name is Stamp Duty Land Tax) which you need to take into account when working out your budget for moving or buying a home.
Before the 2014 Autumn Statement in December, it was charged in bands from £125,000 upwards between 1% and 7% depending on the property value. But after years of criticism, the slightly archaic flat rate system has been replaced and buyers will only be levied progressively above thresholds, similarly to how income tax works.
Under the new arrangements that came into force in December you will now pay stamp duty on a tiered basis on UK property when you buy a property that costs more than £125,000.
There is no stamp duty payable if you’re the seller of the property. The rate paid by home buyers varies depending on the purchase price of the property.
There are five new stamp duty rate bands. You pay stamp duty at the indicated rate on the portion of the price lying within each band.
The new bands are as follows:
Purchase price band Stamp duty rate
£0-£125,000 0%
£125,001-£250,000 2%
£250,001-£925,000 5%
£925,001-£1.5 million 10%
Over £1.5 million 12%
For instance, if you were buying a home for £400,000 you’d pay:
- No stamp duty on the first £125,000 of the total £400,000.
- A 2% stamp duty rate on the next £125,000 up to £250,000.
- The 5% rate on the final £150,000 of your £400,000 purchase.
This works out as: £0 (up to £125,000) + £2,500 (2% of £125,000) + £7,500 (on £150,000) = £10,000 in total stamp duty.
The previous stamp duty arrangement would have incurred a much higher tax bill as a property purchased for £400,000 would have incurred a flat rate charge of 3% of the purchase price – as within the £250,000 to £500,000 banding. This would equate to £12,000 under the old system. Therefore, the new arrangement means a £2,000 saving for the buyer in this example.
These changes show progressive thinking from the government and are considered by many as a significant improvement to the tax system. Under the old system, stamp duty was payable at the highest applicable rate on the total purchase price of a property – a really unfair way of doing things.
Stamp duty inevitably adds friction to the home-buying process by making it much more expensive to move house, and it doesn’t do much to restrain prices. Critics of the old system often pointed to the fact that the flat rate banding system often distorted asking prices.
For instance, there was a 3% band that kicked in if you bought a property worth more than £250,000. Stamp duty on a £250,000 property was £2,500, but were you to pay just £1 more you’d face a stamp duty tax bill of £7,500. You’d pay an extra £5,000 in stamp duty because of that £1!
In reality few people would do that, so house prices were distorted around the different bands by sellers trying to take into account these warping effects when setting their asking price. Similar one-bedroom Zone 3 London flats, for instance, stayed priced at £250,000 for many months even in the rising market before leaping up to £275,000 as a group. Very few people ever paid £255,000 in the meantime.
Buyers also resorted to ruses to reduce stamp duty. Anecdotal evidence suggests that buyers were looking for new ways to minimise their bills. For instance, it was reported in the Telegraph that they had heard of a case where a buyer submitted a bid of £490,000 for a property valued at £520,000 and offered to pay for the seller’s wedding to avoid paying an extra 1pc stamp duty. Other buyers were often susceptible to paying a reduced sum for the property and making a separate payment for fittings and fixtures – which are not liable for stamp duty.
Analysts predict that the total stamp duty you’ll pay on a particular property price is lower in the vast majority of cases under the new system. Chancellor George Osborne says you’d have to spend more than £937,000 to see your bill go up under the new system.
In summary, the main benefit of the 2014 overhaul of stamp duty will be the removal of those cliff-edge distortions, which may make the market a tad more liquid, too. Cynics may suggest that a more liquid market might lead to rising prices which will, in turn, negate some of the tax savings available on the new system.
If you would like to see whether you would be better off under the new system on a potential property purchase then I would refer you to HMRC’s excellent “Stamp duty on UK property calculator”. This allows you to work out what your stamp duty bill under the new system would be. It also shows you what was payable under the old rules, which may be handy to know if you’re in the midst of a move.
