What is stamp duty and when do I need to pay it?

What is stamp duty and when do I need to pay it?

February 26, 2022

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If you’re a first-time home buyer or it’s been a while since you’ve been through the property purchasing process, chances are you might be a little in the dark about stamp duty. Especially given the recent changes during the COVID-19 pandemic. 

When you buy a piece of land or a property in the UK, old or new, you are subject to paying a levy to HMRC called stamp duty land tax.

By understanding what stamp duty is and how much it’s likely to cost early on in the process, you’ll be able to make suitable preparations rather than getting caught short in the wake of an unexpected bill. 

To help you navigate the choppy waters of stamp duty, we’re going to look at a brief history of the tax as well as the main fees or obligations you’re likely to face as property buyers.

Stamp duty: a brief history

Stamp duty is by no means a modern concept – it’s actually centuries old. The term stamp duty derives from the fact that a physical stamp had to be printed on the relevant taxation documents to make them official.

The exact origins of stamp duty are a little hazy, but many believe it’s a levy that was first introduced in Venice in 1604 before making its way through Europe, only to land on the UK’s doorstep around 1694 via King William III and Queen Mary II to fund their war with France.

From 1997 onwards, stamp duty was reformed under both Labour and Conservative governments as house prices began to rise and now, new fees, regulations, and exemptions apply if you’re buying land or a property in the UK.

What is stamp duty and when do I need to pay it?

What is stamp duty, exactly?

At this point, you may have guessed that stamp duty is a form of property tax (and you’d be right).

Essentially, stamp duty – or stamp duty land tax (SDLT) as it’s now known – is a lump sum any land or property buyer must pay to secure their new asset. This compulsory levy exists to secure the legal recognition of particular documents and make the home or land buying process official.

How much does stamp duty cost?

Like many things in life, the amount you pay in stamp duty depends on a number of factors.

Before we dig deeper into stamp duty rates, let’s look at who is subject to paying stamp duty:

  • First-time buyers (in some cases – see more below)
  • International buyers
  • Freehold property buyers
  • Shared ownership land buyers
  • Land that is transferred in exchange for a payment

The official taxation threshold for stamp duty is £125,000 – which means that any property transaction less than this isn’t subject to SDLT.

If your property exceeds the threshold, you’ll be charged 2% of the total price for homes costing between £125,001 to £250,000. So, £5,000 for a home costing £250,000. You are then charged more based on a property value banding system, with the percentage increasing alongside the value of the property.

For example, if your new home’s purchase price is £500,000, you will pay an overall stamp duty fee of £15,000 (2% on the first £125,001-£250,000 and then 5% on the remaining £250,000). To understand how much you might have to pay in SDLT, using a stamp duty calculator is a good idea.

What is stamp duty and when do I need to pay it?

SDLT variations

However, there are also variations in the stamp duty tax rates depending on the type of buyer. 

For first-time buyers, the government offers a relief on stamp duty (meaning you pay less or none at all) based on the following criteria:

  • If you and everyone you are buying the land or property with are all first-time buyers
  • The purchase price of the land or property is less than £500,000 (as of 1 July 2021)

If you’re purchasing multiple dwellings at one time, you can also apply for a stamp duty discount – a package deal, if you will.

Those buying second properties for personal use or as buy-to-let investments are subject to a slightly different stamp duty rate as these investments are classed as second homes.

In these cases, buyers are subject to the standard rate plus a 3% surcharge on each subsequent band. For overseas or international buyers, the same rules apply, but the surcharge is slightly less at 2% per band.

There was a brief reduction of stamp duty rates and surcharges for UK buyers between 8 July 2020 to 31 September 2021 to reinvigorate the economy post-Covid-19 but alas, that’s over. If you’re looking to secure a piece of land or property now, you have to pay stamp duty in full.

That said, there are some SDLT exemptions and you can find out if you’re applicable by visiting the Government’s official stamp duty advice portal.

What is stamp duty and when do I need to pay it?

When do you have to pay stamp duty?

Now that you know how much you’re likely to be charged in stamp duty land tax, let’s consider when you actually have to make a payment.

The most vital detail to remember here is that you must file and pay your stamp duty fee in full within 14 days of completion. If you fail to do so, you will incur fairly sizable penalty fees.

It’s standard practice that during the sale process, your solicitor will file stamp duty on your behalf, which means that the money must be ready to transfer to them prior to your completion date, alongside the outstanding payment for the house and any other fees.

With this in mind, you should find out how much your stamp duty fee is as early in the process as possible to ensure you have the funds in a secure account ready to transfer when the time is right. That way you will avoid going over budget and incurring any nasty late fees.

While stamp duty isn’t the most rewarding part of the home or land buying process, it is 100% compulsory. The more you know up front, the smoother everything will be when it comes to completion.

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