Stamp Duty explained

Stamp Duty - or more formally Stamp Duty Land Tax (SDLT) - is a tax that is placed on the value of land or a property when you buy it. It is named ‘Stamp Duty’ because when it first started in 1694, documents would have a seal or stamp marking them to denote the fact that they had paid their levy.

Nowadays stamp duty specifically refers to the levy paid on the value of a house, and must be paid within 30 days of signing for a house. The government currently receives around £2.79 billion from stamp duty every quarter, and it has long been a significant way of introducing a graduated levy on the property market. It is paid into the general pot of tax in just the same way that income tax is, rather than being allocated specifically for any particular purpose.

Stamp duty takes the form of a graduated tax on all the costs exceeding £125,000. In 2017 the government introduced huge exemptions for first-time buyers to stimulate the housing market, which have had a big impact on who is required to pay stamp duty, and how much they are expected to pay. N.B. This article is only relevant to residential and buy-to-let property as there are different rules for commercial or non-residential properties.

As per these changes, if you are buying a property but already have a primary residence then you will incur a penalty of 3% on top of your pre-existing stamp duty requirements.

As covered in our guide to Buy-to-Let vs Flipping post, there was a general fear that this would make buy-to-let financially unsound, and would lead to a significant, nationwide rent increase. Neither of these have happened, but it is certainly something you need to take into consideration when you are assessing the cost-effectiveness of a buy-to-let investment.

Amendments to the SDLT made them exempt from stamp duty on the first £300,000 of the value of a property that they buy. To qualify as a first time buyer you must not have owned a property anywhere in the world at any time, whether you have owned it or inherited and sold it on straight away. If your house, as a first time buyer, is worth more than £300,000 then you will pay the standard rate on the rest of the value of the property. You can also claim back 5% of the rate of tax on the value of a property between £300,001 and £500,000.

In 2018 the rules were changed so that if you bought your house in a part-ownership scheme with someone who was not a first time buyer, for example a friend or partner, you will still be able to get the discount. This is valid retroactively from 2017, meaning that if you bought a house between 2017-2018 you might be eligible for a significant rebate!

This tax relief only applies on properties that are worth less than £500,000. If you bought one that was £499,000 then you would pay £10,000 in stamp duty compared with £15,000 as a non-first time buyer. Given that the average first-time buyer house price is £207,693 this works out as a considerable saving, as you would pay no stamp duty at all compared with a non-first time buyer of the same property who would pay just over £1,500.

As explained above, Stamp Duty has very clear parameters which can be changed by the government to address certain housing market issues. There are, however, very few ways around it as a property buyer. If a property has been sat on the market for a long time you might be able to convince the owner to share the stamp duty - ideally 50/50 - but many sellers will be reticent to divide this cost. It is, however, one of the only ways to reduce your stamp duty bill if you do not qualify for any other exemptions.

There are rebates available for unmarried people buying a house, although this saving cannot exceed £5,000.

The final question is whether you can, or even should, put the price of stamp duty into the cost of your mortgage. The short answer is that you can, but it probably is not a good idea. This is especially true if you are a first time buyer. While it may be tempting to just borrow the extra cash it will be easier and cheaper to save the cost up before buying the property first. After all, you will be borrowing more from a bank and paying it back for longer, meaning that the actual cost of paying the duty will be higher. It is normally better to save up enough money to pay for the stamp duty out right, or consider buying a less expensive property.

At Vesta, we are not just an online buy-to-let marketplace, we are experts on UK property investment. For more information on Stamp Duty or to discuss your options when buying a property in more detail, get in touch with our friendly and knowledgeable team today!