With another Budget on the horizon this month there’s inevitably talk about taxes. The one that affects us in the property world most is the tax we pay when purchasing a home. But what is stamp duty and who pays it? Let’s take a look.
What is stamp duty?
In England and Northern Ireland it’s called Stamp Duty Land Tax (SDLT). Its equivalent in Scotland is Land and Buildings Transaction Tax or, in Wales, Land Transaction Tax.
For simplicity I’m going to refer to it as ‘stamp duty’ but whatever we call it, this is a purchase tax which is easy for buyers to forget or to underestimate – especially existing owners who haven’t moved for many years.
A generation ago it was a simple and low-cost tax but since the Millennium it’s been used as a huge revenue stream by governments across the UK.
How to calculate stamp duty
As stamp duty is not a ‘flat rate’ percentage but instead based on the value of each flat or house. It’s a huge sum for some buyers. And if you’re buying a second or additional property, you pay a surcharge on top. There are also extra charges again if you are currently living overseas.
On the flip side, the different governments across the UK have temporarily zero-rated stamp duty for many first-time buyers whose purchases are up to a certain level.
A stamp duty calculator, shows, that The duty you pay in the end might be surprisingly high. For example, an existing owner in England trading up to a £500,000 home as their only property will pay £12,500 stamp duty. In Scotland, meanwhile, if you were to buy a holiday home priced at £250,000 you would pay £17,100 in its equivalent stamp duty.
Use a Stamp Duty calculator to work out how much tax is payable for properties in England and Northern Ireland, Scotland and Wales, whether you’re a first-time buyer, moving home, or buying an additional property.
Does It Have to Be This Way?
There are very few ways of reducing or eliminating stamp duty. Unless a property is gifted to you, or if the property you buy is part-industrial then maybe – but these are rare and closely monitored by the authorities. And sometimes they will still incur some form of purchase tax.
However, there is growing debate over whether stamp duty should be tweaked or replaced by a tax which is less of a deterrent to buyers and which might positively discriminate in favour of, for example, first time buyers or older homeowners willing to downsize.
Some people have suggested that sellers rather than buyers should pay stamp duty. The argument in favour is that a seller has probably enjoyed a big rise in their home’s value so they would find it easier to afford a hefty duty.
However, the downside is that many analysts believe house sellers would ‘price in’ the extra duty and so push up the asking price of their home – making existing high prices even higher, which would be more damaging to hard-pressed buyers already having to stump up a deposit and moving costs.
A Completely New Tax?
One group of MPs has suggested something called a Proportional Property Tax (PPT) – this would replace both stamp duty and the current council tax paid by homeowners.
The PPT would be implemented at a flat rate which would be paid annually, and that flat rate would be something around 0.5 per cent of the property’s value. So if a property was valued at £500,000 the annual payment would be around £2,500 or 0.5 per cent.
Supporters of PPT say it would address two injustices in the current system.
Firstly, it would eliminate the big stamp duty lump sum which makes buying a house more expensive. This would be good news, particularly for older owners who put off downsizing because of the high stamp duty. This in turn would ‘free up’ many larger homes for families.
Secondly, they argue PPT would make council tax fairer. Currently, the tax is based on very old data. In England, for example, it’s based on the value a property would have sold for in 1991 and in Wales, it’s 2003. But we all know how house prices have rocketed since then!
In addition, council tax varies massively between different councils. In London, for example, some boroughs have council tax rates that are double those of neighbouring areas.
Winners and Losers
However, even under the PPT some homeowners would end up paying more than they do under the current system. This makes the reform very difficult for politicians to implement, especially with a General Election looming!
While the government has recently announced that it’s keeping taxes on property “under review” few people expect a change in tax before 2024.
In the meantime, when house prices rise this will put more homes into higher stamp duty brackets. For good or for bad, buyers must therefore budget for this extra cost when they calculate the cost of moving.
The government’s own Spring Budget, of course, may change things further but most political and economic analysts anticipate no more short-term changes to stamp duty rates.
But life has been unpredictable of late, so let’s wait and see what the government has in store for us.
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Last Updated: January 18th, 2024
