What Property Owners Need To Know About Stamp Duty

Stamp duty is one of those things that makes home buyers cringe, but not everyone needs to pay stamp duty when they buy a new home. It can help to understand what stamp duty is all about and how much you need to pay according to the value of your home.

However, whether you need to pay stamp duty or not, having good property insurance is a must to help protect yourself and your home from the many risks you face as a property owner, especially if you are a landlord looking to rent out a house, or if you are planning to buy a second home that may stand empty for long periods.

Here we will look at stamp duty, when you need to pay it, and how much stamp duty you will need to pay when buying a new property.

What is stamp duty?

When buying a home in England or Northern Ireland, you might have to pay Stamp Duty Land Tax (SDLT). However, you won’t be charged SDLT if the property you plan to buy is valued under the current SDLT level of £250,000.

The rate of Stamp Duty is subject to change, and changes to Stamp Duty rates are usually announced in government budgets. Property buyers are given plenty of notice of the rate change to plan their property purchases accordingly.

Stamp Duty is the tax you are charged if you buy a residential property or a piece of land in England or Northern Ireland over the current price of the Stamp Duty level. So currently, at the time of writing, you will pay Stamp Duty on residential properties costing more than £250,000 (unless you qualify for first-time buyers’ relief).

Eligible first-time buyers can benefit from paying no Stamp Duty on properties valued up to £425,000 and a discounted Stamp Duty rate on property purchases up to £625,000.

When do you need to pay stamp duty?

Stamp Duty applies to freehold and leasehold properties, so you must pay this tax whether you buy a property outright or with a mortgage.

Stamp Duty Scotland and Wales: For property buyers in Scotland, you will pay Land and Buildings Transaction Tax (LBTT), and property buyers in Wales will pay Land Transaction Tax (LTT) instead of Stamp Duty.

Stamp Duty is paid on property and land transactions that are currently valued at over £250,000, and there are several rate bands for paying Stamp Duty. The tax you pay is worked out on the part of the property purchase price that falls within each Stamp Duty rate band.

You have 14 days to file a Stamp Duty Land Tax (SDLT) return and pay any Stamp Duty due. If you don’t submit a return and pay the tax within 14 days, HMRC might charge you penalties and interest, so it is something you need to attend to quickly to avoid expensive fines.

First-time buyers won’t pay Stamp Duty on a property costing up to £300,000. You will be classed as a first-time buyer if you are purchasing your first home; that will be your primary residence. To qualify, you must never have owned a freehold property or have any leasehold interest in residential property investment in the UK or overseas.

How much is Stamp Duty?

The rate of Stamp Duty you pay will depend on what price threshold the property falls into. Where you are buying in the country will also affect what you pay. For example, rates differ in Wales and Scotland compared to England and Northern Ireland.

Other things may affect what you pay, such as whether you need to pay a surcharge because you are purchasing a buy-to-let property or a second home.

Stamp duty is calculated in the same way as income tax. For example, if the agreed price of a property being purchased by an existing homeowner is £550,000, you pay:

• 0% on the first £250,000 = £0
• 5% on the next £300,000 = £15,000
• Total stamp duty payable = £15,000

However, for a home purchased for the price of £350,000, the Stamp Duty Land Tax you owe is calculated as follows:

• 0% on the first £250,000 = £0
• 5% on the portion from £250,001 and £350,000 = £5,000
• Total Stamp Duty payable = £5,000

Stamp Duty on a second home

If you plan to buy a second home, you will be subject to an extra three per cent in Stamp Duty on top of the standard rate charges. This additional rate applies to property purchased for £40,000 or more, but it doesn’t apply to caravans, mobile homes or houseboats.

Repayment of higher rates of Stamp Duty

It is often the case that house buyers will purchase a new primary home but will experience a delay in selling their previous home. This can mean you are paying the higher rates of Stamp Duty because, technically, you will own two properties.

However, if this happens to you, don’t worry that you will be losing money to Stamp Duty payments because you may be able to claim back the difference by applying for a refund of the higher SDLT rate you paid while purchasing your new home.

You can apply for a refund for the amount above the standard Stamp Duty rates if:

• You sell your previous primary residence within three years, and
• You claim the refund within 12 months of the sale of your previous primary residence, or within 12 months of your SDLT tax return filing, whichever comes later.

How do I pay Stamp Duty?

It is usually the job of your solicitor to deal with paying the Stamp Duty owed on your property. However, you can pay this yourself if you are handling the legal paperwork.

Either way, the ultimate responsibility of paying Stamp Duty falls on your shoulders as the property owner. You must ensure it is submitted on time to avoid any penalties from HMRC.

Is Stamp Duty always payable?

There can be some circumstances where Stamp Duty isn’t payable. Some examples may include the following:

• Transfer of property in pursuance of a court order during separation, divorce or dissolution is generally exempt. If a couple agrees to separate permanently without getting a court order, they will be treated for Stamp Duty purposes as an unmarried couple. If you’re divorcing or separating from your spouse or partner, there’s no Stamp Duty to pay if you transfer a proportion of your home’s value to them.
• Property left under the terms of a will may not be subject to Stamp Duty provided no other consideration is given. There is usually no requirement to inform HRMC in this case.
• If you gift your home to someone else, they won’t have to pay Stamp Duty on the property’s market value, provided there is no outstanding mortgage. So if you transfer the deeds of your home to someone else – either as a gift or in your will – they won’t have to pay Stamp Duty on the property’s market value. If you take over some or all of an existing mortgage, Stamp Duty may be payable on the value of the mortgage over the relevant Stamp Duty threshold.
• If you plan to exchange properties with another homeowner, you will each have to pay Stamp Duty on the property you receive based on its market value.

Conclusion

Stamp Duty charges are applicable when buying a new property above the current SDLT threshold. However, understanding Stamp Duty, calculating it, and paying it is essential for the homeowner if they want to avoid penalties from HMRC.

It may even be worth negotiating for a slightly lower price if the house price is slightly over a Stamp Duty rate band. However, ensuring that you have the proper insurance to protect yourself and your new property can save you a lot of hassle and financial damage should anything happen to your property while you are going through the purchase process.

Enhance your risk management strategy by partnering with Brisco Business for all your business insurance needs.

Darragh Timlin

With over 25 years’ experience, Darragh is an expert in all things insurance. Starting his career in commercial property underwriting, Darragh has worked for a number of global insurers and is now Managing Director of Brisco Business, part of the wider Henry Seymour Group.

All articles by Darragh Timlin