Stamp Duty Explained

Stamp duty is one of the costs you need to consider when you purchase a new home. Depending on the value of the property you buy, it can be a sizeable cost to take into account. Here we take a closer look at what stamp duty is, how much it is, and when you need to pay it. 
 
What is stamp duty?
 
Officially known as Stamp Duty Land Tax (SDLT) in England and Northern Ireland, the charge is a tax that’s paid to the government when you buy property. Some buyers and properties are exempt, while there are different rates that apply depending on the value of the home you buy. 

Do I need to pay stamp duty?
 
You need to pay stamp duty if the property you’re buying costs over £125,000. If the value is less than that, there’s no stamp duty to pay, unless you already own a home and are buying an additional property worth more than £40,000. 
 
If you’re a first-time buyer, you don’t have to pay any stamp duty if the property you buy is £300,000 or less. If it’s between £300,001 and £500,000, you’ll need to pay 5% stamp duty on the portion of the value that is over £300,001.
 
Should the property cost more than £500,000, there’s no first-time buyer relief and you have to pay stamp duty at the usual rates. 

How much is stamp duty?
 
The amount of stamp duty you owe is based on the value of the property you buy. There are two key factors which affect the total cost of a property. Firstly, larger properties will have a higher purchase price than smaller ones, so you’re likely to have to pay more to buy a four-bedroom house as opposed to a one bed new build house. Second the location of your new home will be a factor in pricing as well, with homes in popular areas or near sought after amenities likely to have a higher price tag. 

For the purposes of stamp duty, property is placed within different bands, and you pay a certain percentage of its value accordingly. The percentage of stamp duty that a homebuyer pays, only applies to the part of the purchase cost that falls within each band. For example, if a property costs £300,000, nothing is payable on the first £125,000, 2% is payable on the £125,000 falling between £125,001 and £250,000, so £2,500. 5% is then payable on the £50,000 falling in the £250,001 to £300,00, so £2,500 totaling payable stamp duty of £5,000.
 
The table below shows how the property bands and rate of stamp duty works: 
 
It can be helpful to think of the rates in stages. The first stage is free, while there’s 2% to pay on the next £125,000. There’s 5% to pay on the next £675,000, 10% on the next £575,000 and 12% on any remaining amount above £1.5 million. If you’re buying an additional property worth over £40,000, you need to add 3% on top of the rates above. 

The table below shows how the property bands and rate of stamp duty works:

Property price

Stamp duty rate

Up to £125,000

0%

£125,000 to £250,000

2%

£251,000 to £925,000

5%

£925,001 to £1.5 million

10%

Over £1.5 million

12%

 

How do I calculate stamp duty?
 
Stamp duty is a little confusing, so looking at an example of how to calculate it can be useful. The average house price in England is around the £300,000 mark, so we’ll take this as our property value here. 
 
There’s no stamp duty to pay on the first £125,000, while there’s 2% to pay on the second threshold of £125,000 to £250,000. That’s £2,500 – £125,000 x 2%.  You then have 5% to pay on the £50,000 between £250,000 and £300,000, which is also £2,500. This means your total stamp duty charge is £5,000. 
 
If you’re a first-time buyer, you wouldn’t have to pay any stamp duty as the property doesn’t pass the £300,000 mark. Should you be buying a second home, you’d have £14,000 to pay. That’s £3,750 for the first band up to £125,000, £6,250 for the second and £4,000 for the third. 

When do I need to pay stamp duty?
 
Stamp duty must be paid within 30 days of completing your property purchase. To do this, you have to file a stamp duty return with HMRC and send payment. If you’ve got a conveyancing solicitor working on your behalf, they should do this for you and add the stamp duty charge to their costs. It is possible to add a stamp duty charge to your mortgage, but this will mean you’ll pay interest on it for the duration of your mortgage term. 

When does the stamp duty holiday end?
 
The stamp duty holiday has now ended. The government introduced the stamp duty holiday in July 2020 to boost the UK property market during the COVID-19 pandemic. It eliminated stamp duty for buyers purchasing a new home before 1 July 2021 worth less than £500,000, resulting in a maximum saving of £15,000. Between 1 July 2021 and 30 September 2021, stamp duty returned on properties costing more than £250,000, before returning to the pre-pandemic rates from 1 October 2021. 

If you’re looking to buy a new home, have any questions about the financial and legal part of the home buying process or have any other queries, get in touch with our team today.