When buying property in the UK, it is important to be aware of the tax requirements that come with such a purchase and continued owning of that asset. In England, Wales and Northern Ireland, tax on the sale of property is known as Stamp Duty Land Tax (SDLT), often shortened to Stamp Duty (in Scotland you pay Land and Buildings Transaction Tax instead). Any tax can seem confusing if it is your first time encountering it. Just what is this particular tax, how does it work and will it apply to my purchase? Don’t worry, we’re here to help!
What is Stamp Duty?
As stated above, Stamp Duty is the tax that is applied to property sales in England, Wales and Northern Ireland. Not all property is subject to stamp duty, as it is dependent on the value of the property. There are also different rates that apply depending on whether the land or property is designated as residential or non-residential.
Currently, the thresholds above which stamp duty is applied are:
- £125,000 for residential property
- £150,000 for non-residential property
Any property transaction under those thresholds won’t incur stamp duty, but any sales over those points will be subject to stamp duty at a certain rate.
There is also a higher rate of Stamp Duty for property purchases if you already own a property in the UK and are purchasing an additional one i.e. a buy-to-let property. In this case all property purchases will incur the additional higher rate and will be taxed at a minimum rate of 3%, with the percentage increasing as the price increases.
So what are those rates and how are they applied?
The rate of stamp duty that is applied to a property sale is linked to the value of the property. The higher the price, the higher the tax.
For non-residential properties, the following rates of stamp duty are applied:
- Up to £150,000, there is no stamp duty tax applied
- The portion between £150,001 and £250,000 is taxed at 2%
- The remaining amount, above £250,000, is taxed at 5%
For residential properties, the rates of stamp duty work out as follows:
- Up to £125,000, there is no stamp duty tax applied
- The portion between £125,001 and £250,000 is taxed at 2%
- The portion between £250,001 and £925,000 is taxed at 5%
- The portion between £925,001 and £1.5 million is taxed at 10%
- The remaining amount, above £1.5 million, is taxed at 12%
However, if you are purchasing an additional residential property for £40,000 or more, when you already own at least one other (as is usually the case with buy-to-let properties), they will be taxed at the higher rate of Stamp Duty. For these transactions, stamp duty is applied at the following rates:
- Properties up to £125,000 are taxed at 3%
- The portion between £125,001 and £250,000 is taxed at 5%
- The portion between £250,001 and £925,000 is taxed at 8%
- The portion between £925,001 and £1.5 million is taxed at 13%
- The remaining amount, above £1.5 million, is taxed at 15%
So how does that work out exactly? Let’s take the example of a buy-to-let property that costs £275,000 (if you already own one or more properties, and therefore the higher rate of Stamp Duty applies). The Stamp Duty you would owe on this property is calculated like this:
- 3% on the first £125,000 = £3,750
- 5% on the next £125,000 = £6,250
- 8% on the final £25,000 = £2,000
- Total SDLT = £12,000
Stamp duty is applied equally to freehold and leasehold properties.
So, now you know how Stamp Duty is applied to different property purchases, but how is it paid?
How Do I Pay My Stamp Duty?
Stamp Duty is paid to HMRC, the UK’s taxation department. Whenever you purchase a property of any kind, you must send a SDLT return to HMRC. You must then pay any tax incurred within 30 days of completion.
If you are working with a solicitor, agent or conveyancer to complete your purchase, they will usually file your return and pay the tax on your behalf on the day of completion, then adding the amount to the fees they charge you.
However, if you are conducting the transaction entirely by yourself, it is your responsibility to file the return and pay the owed taxes directly to HMRC.
Understanding stamp duty can seem daunting, and naturally you’ll want to ensure you pay the correct amount. But with patience and careful consideration (and the assistance of a reliable solicitor!), it needn’t be a big headache in the property buying process.
If you found this article useful, you may also find Is Property Still a Good Investment? and The Difference Between Freehold Vs Leasehold Properties interesting.