What is stamp duty? And how will stamp duty cuts affect me?

Stamp duty is a tax you pay when purchasing a new property. The government has temporarily reduced the rates of paying this tax, but what are the new thresholds and how will they impact buyers?

Rhiannon Philps Published on 30 July 2020. Last updated on 20 January 2021.

On 8th July 2020, Chancellor Rishi Sunak introduced some new measures in his Summer Statement in a bid to help the country recover after the COVID-19 pandemic.

The housing market suffered during the months of lockdown, and uncertainty remained even as restrictions were lifted. So, to try to rejuvenate the property market and increase buyer confidence, the Chancellor announced a temporary cut in stamp duty in the Mini-Budget.

This came into effect immediately, and raised the threshold at which buyers would need to pay stamp duty from £125,000 to £500,000. We look at how this change will affect stamp duty charges, and what it will mean for buyers of residential properties.

What is stamp duty?

Stamp Duty Land Tax (SDLT), commonly known simply as stamp duty, is a tax that everyone who buys a residential property in England and Northern Ireland is subject to. Scotland and Wales pay their own forms of tax on property transactions which are similar to stamp duty, and these have also been cut until 31st March 2021.

Before the changes, the threshold for paying stamp duty was set at £125,000. So, buyers who paid over this figure for a residential property would be charged stamp duty at the relevant rate.

The rate of stamp duty increases the more you pay for a property.

Stamp duty rates before the changes on 8th July 2020:

Property purchase price Stamp duty rate
  • Up to £125,000>
  • £125,001-£250,000
  • £250,001-£925,000
  • £925,001-£1.5 million
  • £1.5 million and over
  • 0%
  • 2%
  • 5%
  • 10%
  • 12%

The rates are different for those who are buying their first property. First-time buyers have benefited from increased stamp duty relief as, before the most recent changes, they only needed to pay stamp duty for property purchases over £300,000. Any purchases below this figure were exempt.

People buying a second residential property or buy-to-let properties (costing £40,000 and over) have to pay an additional 3% of stamp duty on top of the normal rates.

What were the Mini-Budget changes to stamp duty?

From 8th July 2020 the rates of stamp duty changed, raising the threshold at which buyers need to pay the tax from £125,000 to £500,000. Buyers can benefit from this reduced rate of stamp duty until 31st March 2021.

So, if the cost of buying a new property is £500,000 or lower, you won’t need to pay any stamp duty on your purchase.

This change applies to first-time buyers as well as those who have previously bought properties.

Sunak claimed that the changes will help people to save £4,500 on average on their stamp duty bill, with approximately 90% of people buying a new home not paying any stamp duty at all.

The increase in threshold means that buyers could save up to £15,000 when purchasing homes of £500,000 or more.

To benefit from the reduced rates, buyers need to complete their purchase before 31st March 2021. If you completed your property purchase before 8th July 2020, you would have to pay the usual rates of stamp duty- you can’t apply for a refund.

The revised stamp duty rates that are valid until 31st March 2021 are:

Property purchase price Stamp duty rate
  • Up to £500,000
  • £500,001-£925,000
  • £925,001-£1.5 million
  • £1.5 million and over
  • 0%
  • 5%
  • 10%
  • 12%

Even though the stamp duty bands are unchanged for properties over £500,000, those buying more expensive properties will still benefit from the tax relief. Rather than starting to pay stamp duty on the value of their purchase over £125,000, they will only pay the tax on the amount over £500,000, which will save them some money.

So, for example, if you are purchasing a property for £550,000, you won’t pay any tax on the first £500,000. You will then have to pay stamp duty on the remaining £50,000 at a rate of 5%, which is £2,500. So, the total amount of stamp duty you will pay under the revised rates would be £2,500, compared to £17,500 under the old rates.

How will the stamp duty changes affect first-time buyers?

First-time buyers will also benefit from the temporary raised threshold, so they won’t pay stamp duty tax on any properties under £500,000.

However, in reality, the impact on this group is likely to be minimal. The majority of first-time buyers didn’t pay stamp duty tax anyway as most of the properties they bought cost under £300,000, so this temporary cut may not be as significant for them as it might be for some other buyers.

The relief will only make a difference to first-time buyers who are purchasing more expensive properties over £300,000.

Before looking at purchasing your first property, compare mortgages for first-time buyers.

How will the stamp duty changes affect those looking to buy another property?

Although those buying a second home worth £40,000 or more will still have to pay an extra 3% of stamp duty, this will be on top of the temporary revised rates so they too will benefit from the relief.

For example, if a buyer pays £500,000 or lower for a second property, under the revised rates they would only be charged stamp duty at a rate of 3%.

If you are buying a new home which will be your main residence and you have already sold your previous home, you won’t need to pay the extra 3% stamp duty charge.

However, if you have not yet sold your home when you complete the purchase of your new home, you will need to pay the additional 3% rate on top of the usual stamp duty charge. If you then sell your previous home within 36 months you can apply for this extra charge to be refunded.

Bear in mind that, even if you haven’t purchased a property before, if your partner or anyone you are buying with already owns a property you will have to pay the higher rate of stamp duty.

How will the stamp duty changes affect landlords?

Buy-to-let investors will also need to pay the additional 3% surcharge on top of the usual stamp duty rates. As this charge will be placed on the revised rates, buy-to-let investors can still save money on stamp duty tax until 31st March 2021.

If you’re considering a buy-to-let investment, don’t forget to compare buy-to-let mortgages first.

How do I pay stamp duty?

It is likely that your solicitor will manage your stamp duty payment but, as you are legally responsible for making sure you pay the tax, you should confirm this with them.

Buyers have 14 days from the date of completion when contracts are signed to pay their stamp duty. If you pay after this time period you could be fined.

Should I buy a property to make the most of the reduced stamp duty?

If you want to benefit from the reduced rates of stamp duty, you will need to complete your purchase before 31st March 2021. However, although the stamp duty cuts could save you money on your purchase, this should not be your only consideration when buying a house.

It is important to think carefully and do plenty of research if you’re considering purchasing property, looking at the housing market and your own personal circumstances before making a decision.

You may also want to look into what mortgage deals are available, researching their loan-to-value (LTV), interest, fees, and term lengths, to see if there are any suitable options for you.

About the author:

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

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