The Chancellor announced in 2018 that stamp duty was being abolished for some first-time buyers, but many home buyers will still end up paying Stamp Duty Land Tax on their properties. The amount you pay can vary depending on a number of factors, but our extensive guide and FAQs will help guide you through this tax and answer any questions you might have.
What is stamp duty?
Stamp duty or, more fully, Stamp Duty Land Tax (SDLT) is a tax that you pay to HMRC when buying a property over a certain price. It is a lump-sum tax that is paid within a set time of completing the purchase. How much you will pay depends on a number of factors, including the price of the property, whether you are a first-time buyer, if you are purchasing the property as a second home, and whether it also has a commercial use. This guide will focus on residential properties (homes) rather than commercial properties, however.
The rules on stamp duty have changed several times since its inception. One of the biggest changes, introduced in 2014, saw the tax being changed from a “slab” system, where a single rate was paid based on the entire property price, to a progressive system using price bands.
Stamp duty in England and Northern Ireland
The current system applies to England and Northern Ireland, and you pay tax based on different rates for different portions of the entire cost of the property.
This can be quite complex to work out, so let’s say, for example, that you are buying a property for £500,000.
- You pay nothing below £125,000
- You pay 2% on the portion between £125,000 and £250,000
- You pay 5% on the portion between £250,000 and £500,000
This means that you pay 2% of £125,000 = £2,500
Plus 5% of £250,000 = £12,500
So the total amount of stamp duty you would pay in this case would be £15,000.
Stamp duty for first-time buyers
If you are buying your first home in England or Northern Ireland, different rules apply, as long as the property costs no more than £500,000.
In this case, the first £300,000 is exempt from stamp duty. This means that you will not pay any stamp duty on properties that cost £300,000 or less. If they cost between £300,001 and £500,000, then you will only pay stamp duty on that portion, at a rate of 5%.
So, going back to the above example of purchasing a property for £500,000, only this time for a first-time buyer:
You pay nothing below £300,000You pay 5% on the portion between £300,000 and £500,000, which is £10,000
In this case, you would pay £10,000, making a saving of £5,000.
If you are buying a home worth more than £500,000, you will have to pay standard stamp duty rates, even if you are a first-time buyer.
Note that if you buy as a shared owner (with a spouse or partner, for example) and you are both first-time buyers, you will be able to get the first-time buyer’s rate, as long as the property does not cost more than £500,000.
Will I count as a first-time buyer?
For the purposes of stamp duty, a first-time buyer is a person who has never owned their own home anywhere in the world. Despite the name, this includes properties that you inherited, so you might be better thinking of it as “first-time homeowner” rather than buyer.
Additionally, you will not count as a first-time buyer if you are buying a home with the intention of renting it out, even if it is your first property purchase.
The Scottish equivalent to stamp duty
In Scotland, there is a similar system called “land and buildings transaction tax”. It still works on the same principle, being a lump-sum tax that you pay when you buy a property over a certain amount, but the thresholds for the bands are different.
Using the example of a £300,000 property purchase:
- You pay nothing below £145,000
- You pay 2% on the portion between £145,000 and £250,000
- You pay 5% on the portion above £250,000
This means that you pay 2% of £105,000 = £2,100
Plus 5% of £50,000 = £2,500
So the total amount of stamp duty you would pay in this case would be £4,600
The Welsh equivalent to stamp duty
Wales also has a system that works the same way but with different rates. It is known as the Welsh Land Transaction Tax.
For a property costing £300,000:
- You pay nothing below £180,000
- You pay 3.5% on the portion between £180,000 and £250,000
- You pay 5% on the portion above £250,000
This means that you pay 3.5% of £70,000 = £2,450
Plus 5% of £50,000 = £2,500
So the total amount of stamp duty you would pay in this case would be £4,950.
What rate of stamp duty or equivalent tax will I pay?
The rate of stamp duty you have to pay (or the equivalent tax in Scotland and Wales) will depend on the purchase price of the property.
The first part is always exempt from stamp duty. After that, you pay a percentage rate that rises at certain thresholds. Remember though, you only pay that rate for the portion of the price that falls within each band.
People buying additional properties such as second homes will also have to pay an extra stamp duty charge on any property that costs more than £40,000.
This is an extra 3% for each band, so for the first £125,000, they will be charged 3%. For the portion between £125,001 and £250,000, they will pay 5%, and for the portion between £250,001 and £500,000, they will pay 8%, etc.
The standard rates of stamp duty are as follows:
- £0 to £125,000 0%
- £125,001 to £250,000 2%
- £250,001 to £925,000 5%
- £925,001 to £1.5m 10%
- More than £1.5m 12%
What rate will I pay as a first-time buyer?
If you are a first-time buyer and your property costs no more than £500,000, you will pay different rates. If it costs more than £500,000, you will pay the standard rates as shown above on the whole cost of the property.
For first-time buyers buying a property for £500,000 or less, the following rates apply:
- £0 to £300,000 0%
- £300,001 to £500,000 5%
What rates will I pay in Scotland?
Scotland has a similar system, but the rates and thresholds are different.
The standard rates are as follows:
- £0 to £145,000 0%
- £145,001 to £250,000 2%
- £250,001 to £325,000 5%
- £325,001 to £750,000 10%
- More than £750,000 12%
How do I pay the stamp duty I owe?
It’s important to remember that you have 30 days from the date of completion to pay any stamp duty you owe. This also applies to the equivalent taxes in different parts of the UK.
In practice, your solicitor will usually pay this and add it to your bill, but it is still your responsibility to make sure that any stamp duty owed is paid. If you do not pay it or are late, you could face additional penalties and interest.
If your solicitor does not pay it for you, you will need your Unique Transaction Reference Number (UTRN). The easiest way to pay directly is by making a bank transfer to HMRC. In Scotland, you will pay Revenue Scotland instead of HMRC, but, again, your solicitor will probably take care of this on your behalf.
Can I add the stamp duty I owe to my mortgage?
The short answer is that you may be able to (depending on the lender), but it’s often better if you don’t. The stamp duty will be paid to HMRC straight away as it is a lump sum tax, but you will usually end up paying the cost of it back to your lender for the lifetime of your mortgage. Over a 25-year term at a rate of 5% interest, this could mean that an extra £5,000 of borrowing to cover the stamp duty would cost around £8,500 in additional interest.
It could also affect your loan-to-value ratio (LTV), which is a figure based on how much you are borrowing against the value of the property. Borrowing more could push this figure up and affect the mortgage rates and deals that your lender is willing to offer. It may be worth consulting a mortgage broker to see if adding any stamp duty to your mortgage is the best decision.