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Stamp Duty & Land Tax – A Simple Guide

by | Oct 15, 2022

Home $ How to buy a property $ Stamp Duty & Land Tax – A Simple Guide

Introduction

Stamp duty and land tax as a term are generally just referred to as stamp duty in the UK. The tax differs between where you are in the Uk as well as the type of purchase and the overall value of your property.

It is one of the many legal terms you have to get familiar with when learning how to buy a property. Avoiding learning these legal terms may result in you missing deadlines and having to pay late fees or interest on your tax. So it is definitely staying on top of what you have to pay and when.

Hands representing tax collection

What is stamp duty land tax?

The tax you pay on a property when you purchase it is called stamp duty and land tax.

Specifically, stamp duty doesn’t have anything to do with stamps but is just an additional tax just like the land tax. It gained its name years ago when the documents required to be sold under stamp duty required a physical stamp in order to be processed.

Now, we still call it by the same name but the stamp isn’t necessary and it remains one of the many ways the UK government taxes the population.

In recent years, higher stamp duty rates have been associated with a slower economy and lower stamp duty rates associated with a growing economy. For example, after the brunt of the global pandemic in July 2020, a stamp duty holiday was put in place to help encourage foreign investment and spending.

As of 2022, this rule no longer is in place and stamp duty rates are back according to the relevant value of a property and applicable to purchases of property in any setting, from using a mortgage to buy a property in cash, to buying a property at auction.

When was the stamp duty land tax introduced?

The origins of the idea of stamp duty go back as far as 1694 when a transaction tax was placed on everyday commercial goods like dice to raise money for war. These goods are comical compared to what we use stamp duty for today.

As the UK has progressed to the modern day, intriguingly, stamp tax has stopped being charged for purchases of commercial items and now remains solely on business transactions like bonds, stocks and as discussed in this article, property.

Since then, this law has evolved to be called different names depending on the country in the United Kingdom.  

England and Northern Ireland: Stamp duty and land tax (SDLT)

Stamp duty and land tax was implemented in 2003. This was the original law that came in under a finance act. Afterwards, Scotland and Wales developed their own versions of the same law that slightly differs.

Calculating stamp duty and land tax on paper

Scotland: Land and buildings transaction tax (LBTT)

Land and building transaction tax came into effect in 2015 to create a tax that was more accurate to the value of the property being sold. However, the percentages are still very similar.

Wales: Land and transaction tax (LTT)

LTT is the most recent of the three being applied to Wales in 2018. It has the highest threshold of any other type of property stamp duty. You can find more about these exact thresholds by clicking here for the welsh government website.

Why were the stamp duty and land tax introduced?

It was used to tax the appreciation landlords received in profit from selling property. This follows the clear appreciation of real estate that the UK has seen.

This means landlords cannot solely buy and sell the property as a business model. They are encouraged to add value to the property market by other means such as increasing rental income or building to rent instead of flipping new builds for example.

Is land tax the same as stamp duty?

Land tax and stamp duty are in fact different. They are similar in how they function but land tax is applied to the purchase of land whereas stamp duty is applied to the purchase of a property.

They have the exact same tax bands and typically, when referring to stamp duty, the full term of stamp duty and land tax is considered.

Who pays stamp duty, the buyer or seller?

In all cases, the buyer pays the stamp duty on the purchase of a property. They will have to work out what tax band they’re in and submit their return to HMRC on the government website you can find here.

Once this is approved by HMRC, you’ll have 14 days to pay your stamp duty or face paying interest on the tax that is due leading up to the date the tax is paid off. 

Unlike other forms of tax, you don’t pay it based on rental income or rental yield but instead, pay stamp duty without making any money. Just on the purchase of a property.

Do I have to pay stamp duty on land purchases?

Yes, stamp duty has to be paid on land purchases. However, land purchases can a lot of the time fall under a commercial purchase. This means you will pay a maximum of 5% on SDLT and avoid any additional surcharges.

Even if you are a landlord looking to purchase land to build residences, you can justify your purchase as a commercial deal because there aren’t any residences built on the land yet.

In addition, sometimes a plot of land may actually be residential but you can justify it being a commercial purchase even if the land contains buildings used for living. You can check if your property is residential here.

Deciding whether to pay stamp duty on land purchases

To do this, a landlord can add commercial areas to the land such as a small agricultural field or land that doesn’t seem like it fits the size of the house you’re buying to justify it having commercial use.

Additional ways of justifying a commercial recognition for your property include:

  • Grazing leases
  • Agricultural leases (more on this here)
  • Forests

Stamp duty land tax for first time buyers vs standard rates?

First time buyers are exempt from stamp duty up to £300,000. Stamp duty then is charged on the equity exceeding £300,000 at a rate of 5% up to £500,000. After this £500,000 property purchase price, there is a stamp duty exemption for first time buyers.

For those who have already purchased a property, there is no stamp duty relief and the rates follow a staggering effect right up to 12%.

Stamp duty and land tax rates can even get higher than this with the addition of surcharges.

Standard SDLT rates vs first time buyer SDLT rates

Stamp duty and land tax is subsidised for first time buyers. If it is your first home purchase, you won’t have to pay any SDLT if your property is worth less than £300,000. The rates get progressively higher as the value of a property increases until the value becomes too high to qualify for the first time buyer status. For the official government PDF on these rates, click here.

SDLT rates for first time buyers

When comparing these rates to the standard rates, it is easy to see the saving in tax available. For example, a first time buyer buying a £275,000 property can save £13750 from not having to pay the standard 5% STLD rate.

Standard SDLT rates

These staggered bands of tax ensure that the more valuable your property is, the more you’ll have to pay in tax.

Buy-to-let and second home stamp duty tax bands

As a result of a growing property market that favoured investors with the equity for large deposits, many people looking to get on the property ladder for the first time became pierced out of home purchases.

Correspondingly, the government announced an extra 3% SDLT for those buying a second home or buy to let. Now, no matter how low the value of the purchase of a property, if it is a second home or buy to let, you will always pay at least 3%.

SDLT rates for a buy to let and second home purchases

The below table breaks down these rates. They get even higher if you are in Scotland or Wales. Check what these rates look like out of England and Northern Ireland here.

BTL : Second home rates

stamp duty and land tax reliefs

There are a few methods of paying less stamp duty. It is important you explore these options as you could save yourself a lot of money in tax or even think you are eligible for certain tax benefits that you aren’t.

Firstly, it’s necessary to find out if you could be excluded from stamp duty or if there are additional tax reliefs.

Who is exempt from stamp duty?

First time buyers are exempt from stamp duty if their home is worth less than £250,000. You may also be exempt from stamp duty if the property is given to you from a will or a divorce settlement. For a full list of scenarios where an exemption from stamp duty applies click here.

In addition, those buying a commercial building are not exempt from stamp duty but pay significantly less at 5% maximum. This can include buying a shop or warehouse as part of a business.

Below are the stamp duty rates for commercial freehold properties:

SDLT rates for commercial properties

What other tax reliefs are there for first time buyers?

If you are a first time buyer, aren’t exempt from stamp duty as your property, or are just curious as to what additional benefits there are available to you. 

There are other avenues to explore to reduce your tax bill and enter the property ladder with as much upside as possible. 

Help to buy ISA

A help to buy ISA is a savings scheme run by the government whereby the government will add an additional 25% to your ISA based on what you have already saved. 

The maximum you can save that the ISA will pay you with a bonus is £12,000 and the maximum price of your home has to be £250,000 or £450,000 if you live in London.

So for example, if you save £10,000 for a deposit on your ISA, you can claim a bonus to put a down payment on your mortgage of £2,500.

Help to buy scheme

A help to buy scheme is set up by the government to allow first time buyers the opportunity to use 5% of the value of a property as a deposit.

This works by the government giving you an interest-free loan that is worth 20% of the value of the property (40% in London) for you to use as a deposit for the mortgage. For example, a property worth £100,000 can be bought with a £5,000 deposit by qualifying for a £20,000 loan which will qualify you for a £75,000 mortgage.

Your eligibility for the help to buy loan is dependent on the value of the property. This value threshold varies where in the UK you’re buying and can be determined by getting a property valuation and attempting to sell a property at that price. London has the highest threshold as property prices are highest in the capital. Check out these thresholds here

This scheme is available until the 31st of October 2022 and all homes must be completed by the 31st of March 2023.

Are there other forms of tax relief without being a first time buyer?

If using your first time buyer status to reduce stamp duty is of the cards, then using other methods could also work. These include trying to qualify your property for the commercial stamp duty and land tax category or signing up for multiple dwellings relief.

Three bent copper coins

Using a non-residential category

Trying your best to get your property purchase to qualify for a commercial deal rather than a residential sale would be an easy way to save some money on stamp duty.

No matter how expensive a commercial sale is, you will never pay more than 5% on SDLT as of 2022. It can be as simple as getting a grazing licence or adding a bit of forest to your land to qualify. It would be wise to read how to qualify for this in detail and speak to a qualified tax professional beforehand.

Buy a home with no money

While not a method to directly reduce your tax, if you’re a land owner already, you could take some equity out of a home you already have by remortgaging it. In this way, you’ll effectively be buying a home with no money.

By increasing your rental income through buying a new buy to let and reducing your expenses such as home insurance, a landlord can reduce the effects of taxation.

Is stamp duty land tax deductible?

Stamp duty isn’t deductible from any form of income tax. This is because stamp duty is meant to only relate to the sale of a property and rental income for example would be considered a completely different form of income to the sale of a property.

Calculating individual income tax

However, because stamp duty reduces the sale amount of a property, you can use it to reduce your capital gains tax,

Stamp duty land tax and shared ownership

If you buy a property through the public sector or a housing association, for example, you pay a different type of stamp duty and land tax. Because you are buying your property as a share, the transactions count as linked transactions rather than individual ones.

Linked transactions happen when there are multiple purchases involved but they all can be attributed to the same seller. For example, if two people from the same household were to buy separate parts of the same property. Or if a landlord purchases multiple houses from the same developer.

You would pay a unique amount of stamp duty and land tax that must be calculated based on the number of purchases you’ve made as well as where you have bought the property from. Click here for more information on this from the UK government website.

In addition, if you are applying for stamp duty under shared ownership, you may also qualify for multiple dwelling relief. There is more on exactly what this means using this link. It goes hand in hand with SDLT using shared ownership but the exact relief can be challenging to calculate.

Recent changes to SDLT

As a landlord, it is vital you stay on top of recent changes to any law to do with a property. A law change can mean the opportunity to save money in tax from a simple adjustment or it may even impact your property purchase decisions in the long term.

By being armed with the up to date knowledge when it comes to property you’d be able to use the law as a weapon rather than something that doesn’t help you.

The 2% surcharge

Starting on April 1st 2021, the government started charging non-UK citizens an extra 2% on stamp duty for all brackets of property value. So if you haven’t lived in the UK for more than 6 months of the previous 12 months, you’d have to be taxed this additional 2% fee.

Some say this has slowed down the UK economy and recently, Lizz Truss, current prime minister of the UK has stated this. See more on this story here.

To conclude

Stamp duty is a very sophisticated subject and there are multiple avenues for you to save money on your tax. Speaking to a reputable solicitor who can go over these fees with you would be helpful.

However, it is not always recommended that they give you direct legal advice so forming a good understanding of how stamp duty works yourself will set you up well for paying your stamp duty.

It is also considered good practice to calculate your stamp duty as far in advance as possible so you don’t get caught out with paying it late. Not having the funds available to pay your stamp duty when it is due can result in you paying more in the long term as you accrue interest.

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