The 2019 ISA season is now in full swing, and it's as good a time as any to focus on financial planning - and, within that, looking ahead to your retirement years to ensure financial security.
Your guide to stamp duty in the UK
A hot topic among homeowners and prospective buyers is that of stamp duty. Very few taxes are popular with the general public, but this one in particular has proved to be a source of controversy. And with the regular changes to stamp duty in recent years, it's not always easy to keep pace with the status quo. That's why we've put together this brief guide to help clear the fog.
What is stamp duty?
The term 'stamp duty' first came about in the UK back in 1694, whereby duties were applied to a variety of goods (including playing cards, newspapers and dice) to generate income for the monarchy. These were administered by the Board of Stamps, and required a physical stamp upon purchase.
However, this form of tax has since evolved, and in late 2003 was widely abolished. At present, stamp duty comes in two primary forms: 1) Stamp Duty Reserve Tax, which applies to the transfer of securities and shares; and 2) Stamp Duty Land Tax (SDLT) - or the Land and Buildings Transaction Tax (LBTT) as it is known in Scotland, and the Land Transaction Tax (LTT) in Wales - which is a transfer tax on land purchases.
It is the latter which has become a bit of a political football, particularly given the raft of notable changes which have been made since 2003:
- In 2005, following so-called ‘bracket creep’ amid the housing boom, the threshold for paying SDLT doubled from £60,000 to £120,000
- A year later, the threshold was raised to £125,000, and £150,000 in selected areas regarded as less affluent
- In 2008, the SDLT threshold was raised to £175,000 for a limited time period (until the end of 2009)
- In 2010, the new Coalition Government abolished stamp duty for first-time buyers (on homes under £250,000) for a two-year period, while also introducing a new 5 per cent rate for properties valued at over £1 million
- In 2012, a new rate of 7 per cent was brought in for homes costing over £2 million
- In 2014, a progressive system was introduced whereby buyers no longer pay one rate on the total amount, and instead are charged by band
- From April 2016, a 3 per cent surcharge was introduced on additional properties
- At Budget 2017, SDLT (and LTT) was abolished for first-time buyers in England and Wales on the first £300,000 of the property value
So how much stamp duty will you pay?
There are a number of stamp duty calculators available online to help crunch the numbers, but we'll provide a basic overview here. Essentially, you'll pay a percentage of the cost of the home - a percentage which rises with each threshold.
In England and Northern Ireland, you won't pay a penny of SDLT on the first £125,000 of the home's value. For the next tier - £125,000 to £250,000 - you'll pay a rate of 2 per cent. This climbs to 5 per cent when you move above the £250,000 threshold, and then soars to 10 per cent for the band between £925,000 and £1.5 million. The rate then remains fixed at 12 per cent once you move above £1.5 million.
So, for example, if you purchase a home valued at £500,000, you will pay the following:
- 0 per cent on the first £125,000 (£0)
- 2 per cent on the next £125,000 (£2,500)
- 5 per cent on the next £250,000 (£12,500)
- This makes for a total of £15,000 in SDLT
For first-time buyers, the picture changes, as you would be exempt from stamp duty on the first £300,000, meaning the total due would be 5 per cent on the purchase price above this threshold, which is £10,000 (or 5 per cent of £300,001 to £500,000).
For additional properties - be that holiday homes or Buy-to-Let - the rates are particularly severe:
- Up to £125,000: 3%
- £125,000.01 – £250,000: 5%
- £250,000.01 – £925,000: 8%
- £925,000.01 – £1,500,000: 13%
- £1,500,000.01+: 15%
How much do you pay in Scotland and Wales?
The LBTT system in Scotland, introduced in 2015, bears much resemblance to SDLT in England and Northern Ireland. The only differences are the thresholds and rates. Homes bought in Scotland do not incur LBTT on the first £145,000, while you'll pay 2 per cent within the £145,000 to £250,000 tier. The next threshold is £250,000 to £325,000, on which you'll pay 5 per cent on the value of your property. You then pay 10 per cent on the following tier (£325,000 to £750,000), and 12 per cent above £750,000.
So, taking the above example where the house is valued at £500,000, the amount of LBTT due would be £23,350 (£0 + £2,100 + £3,750 + £17,500).
In Wales, LTT replaced stamp duty in April, and again differs only in thresholds and rates. Using the above example again, where the property price is £500,000, the breakdown of LTT due would be as follows:
- 0 per cent on the first £180,000 (£0)
- 3.5 per cent between £180,000 and £250,000 (£2,450)
- 5 per cent between £250,000 and £400,000 (£7,500)
- 7.5 per cent on the amount above £400,000 (£7,500)
This makes for a total of £17,450 in LTT
Should we expect any further changes to stamp duty?
Stamp duty has come in for a lot of criticism. The crux of this is that it is said to hinder mobility, and therefore contribute to the housing crisis. On one hand, it is a drain on aspiration, insomuch as it is a costly hurdle for first-time buyers (albeit the new exemption will help to alleviate this), and makes it more expensive for growing families to upscale.
Equally, it dis-incentivises those who perhaps may be interested in downsizing from doing so, meaning that couples or families end up staying in bigger homes than they need. Added to that, the sharp rate rises between thresholds has seen sales of more-expensive homes slump considerably over the last few years.
Nevertheless, SDLT has proved to be a golden egg for the Treasury, with a record £13bn in revenue having gone into the coffers in 2017 from this tax - a 13 per cent increase on 2016, and a near 100 per cent increase from 2012.
As such, it seems unlikely that the Chancellor will be offering up too many gifts to the public with respect to stamp duty at his Budget speech come the end of the month. Indeed, the only change that appears probable is a stamp duty hike on purchases by individuals and companies who pay their income tax abroad.
That said, Treasury revenues are not the be-all and end-all, and, should the logjam in the housing market continue for the foreseeable future as a result of SDLT, LBTT and LTT, then this is a tax that will need to be looked at. And while rash, populist changes are not the answer, one can't help but feel that a more imaginative, fit-for-purpose solution that encourages mobility is not too difficult to find.
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