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What is stamp duty?

stamp duty

Stamp duty is a transaction tax which is paid when buying a property

Stamp duty is the tax which a person when buying a property. Stamp duty applies when the cost of the property exceeds a certain amounts. The rate of stamp duty varies according to the type of property and the price of the property.

Let’s assume you’re buying a property for £300,000.

Old system:

You would have paid 1% on a property between £125,000 and £250,000, between £250,000 and £500,000 you’d pay 3%. So because the purchase price is over £250,000, you’d have paid 3% on the entire purchase price, despite only being £50,000 above the threshold. Thus, you’d have paid £9,000 in stamp duty.

There have been big changes in the stamp duty system and the difference between the old system and the new system is explained below:

New system:

You pay nothing below £125,000, which is £0
You pay 2% on between £125,000 and £250,000, which is £2,500
You pay 5% on the value of the property above £250,000, which is £2,500

So in total this means you’ll pay £5,000 (£0+£2,500+£2,500).

What rate will I have to pay?

The rate of stamp duty increases with the cost of property but you only pay the proportion of the purchase price that’s actually above the thresholds at the higher rate. Those buying additional property will have to pay an extra stamp duty charge on any property costing more than £40,000. Under stamp duty rules of 2014, you pay different rates for different proportions of the property price.

What rate will I have to pay on property in Scotland?

In Scotland, you only pay the proportion of the purchase price that’s actually above the thresholds at the higher rate.

How do I pay stamp duty?

You have to pay stamp duty within 30 days from the date of completion/date of entry when buying property in the UK. You can take the help of your solicitor for paying the bills.

Can I add stamp duty to my mortgage?

The simple answer here is that it’s best that you don’t, but many people find that they have to.

To add the cost of stamp duty to your loan is a case of borrowing more when the mortgage is taken out. So, say you needed a £180,000 mortgage to purchase a house costing £300,000, but wanted to add the stamp duty, you’d need to request borrowing of £185,000 (in England, Wales or Northern Ireland). Then use your ‘extra’ deposit money to pay the stamp duty.

There are two main things to consider here. Firstly, as mortgages tend to be taken out over a long term (25 years or more), that’s normally how long the stamp duty borrowing will last too. Over a 25-year term, at a rate of 5%, that extra £5,000 borrowing will cost around £8,500 in interest, so it’s vital to be aware of the cost.

Secondly, this could affect your loan-to-value ratio (LTV) – the measure of how much of a property’s value you are borrowing. The most competitive deals require a maximum LTV of 60% – yet in the example above, adding the stamp duty would push you from 60% to almost 62%, so be careful – speak to a mortgage broker to see if it’s the right decision.

Risk Warning:

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

Paul

The author Paul