Introduction to Stamp Duty Land Tax

Introduction to Stamp Duty Land Tax

If you’re buying a property in the UK, it’s helpful to understand what stamp duty land tax is and whether it applies to your purchase. In some cases, you won’t need to pay it at all. However, in others, it could be one of the largest costs after your deposit and mortgage fees. 

In this article, we look at the main elements of stamp duty land tax and how it applies to different properties and land purchases. 

What is stamp duty land tax?

Stamp duty land tax (SDLT), or, as it’s otherwise known, stamp duty – is a fee charged on properties by HMRC. This cost applies to residential homes over £125,000 and non-residential properties and land purchases over £150,000. 

In some cases, you may not pay stamp duty land tax on your home, even if it’s above £125,000. For example, there’s a higher property value limit for first-time buyers. So, exploring the rates and stamp duty relief before purchasing is essential. 

How is stamp duty land tax calculated?

Stamp duty is calculated based on the price you pay for your new property. Generally, the higher the value, the more you pay in SDLT. However, there are some discounts and reliefs depending on your circumstances. 

For instance, from 23 September 2022, first-time buyers get stamp duty relief for properties up to £425,000 with 5% on the remainder up to £625,000. Second homeowners are subject to a 3% surcharge in any rate band unless they are replacing their main residence with another. 

How much is stamp duty land tax?

The rates for stamp duty in England are: 

• Up to £125,000 – 0%
• The next £125,000 (the portion from £125,001 to £250,000) – 2%
• The next £675,000 (the portion from £250,001 to £925,000) – 5%
• The next £575,000 (the portion from £925,001 to £1.5 million) – 10%
• The remaining amount (the portion above £1.5 million) – 12%

* Tax rates vary in Scotland and Wales which are subject to Land and Buildings Transaction Tax and Land Transaction Tax respectively instead of SDLT.

If you’re buying another residential property, i.e., a holiday home, you’ll have to pay an additional 3% on top of these rates. 

Stamp duty on second homes

For properties that you don’t intend to live in permanently, for example, a buy-to-let or holiday home, there’s a higher stamp duty rate to pay if you already own another dwelling. Currently, stamp duty on second homes is an additional 3% on top of the normal SDLT – even if the prices are below the £125,000 threshold.

There are some exceptions, such as if you’re buying another property and intend to live in it as your main residence at a later date. You may be eligible to claim a refund on the stamp duty land tax on the second home once you’ve sold the other property. 

Stamp duty relief for first-time buyers

Getting on the property ladder can be daunting, especially with the extra costs and taxes that make up the purchase. Fortunately, if you’re a first-time buyer, you can take advantage of stamp duty relief. 

If you’re purchasing a property valued up to £425,000, you won’t pay any stamp duty. There’s also a discounted rate of 5% on the slice of the price between £425,000 and £625,000 for homes up to £625,000. However, if you’re buying a house over this value, first-time buyer stamp duty relief won’t apply, and you’ll pay the standard rates. 

It’s also worth noting that to be eligible for this relief – you must not have owned a property in the UK or abroad. This also applies to any inherited homes. 

Annexe stamp duty relief

Multi-generational living means more people are considering homes with separate dwellings or granny annexes. When buying a property with an annexe, you could benefit from stamp duty annexe relief or, as it’s otherwise known – Multiple Dwellings relief (MDR). 

This rate is calculated by dividing the amount paid for the whole property by the number of dwellings. Then work out the tax due on this figure and multiply it by the number of dwellings. This means you typically pay less overall compared to the total figure based on SDLT rates. 

Am I eligible for a stamp duty land tax refund?

Second home stamp duty land tax refund 

You pay an extra 3% stamp duty charge when purchasing a second home. However, if you intend your new property to be your main residence replacement and you sell your old main residence within three years, you could get this extra money back. 

Stamp duty refund on homes with an annexe

In 2018, HMRC changed the rules on SDLT for properties with a granny annexe. Previously, they may have encountered an additional surcharge. However, they’re now classed within the whole property. So, as long as the annexed meets specific criteria, such as being worth no more than less than one-third two-thirds of the value of the total property main home, you could be eligible for a refund. 

Conclusion

Stamp duty land tax is a complex area, and it gets even trickier when trying to claim a refund for overpaid SDLT. The above outlines the foundations of what you’ll pay when buying a property. However, if you’d like more advice or want to chat with our stamp duty land tax refund specialists – get in touch with Cannon Chambers, and we’ll be happy to advise you to answer any questions on a no-obligation basis.