What is stamp duty land tax?
Stamp duty land tax (SDLT) is a self-assessed tax paid on the transfer of real property (land and buildings) in England and Northern Ireland. For first-time buyers, the threshold for paying stamp duty is much higher due to the government's relief scheme.
Historical origins of stamp duty
Stamp duty was introduced in England in 1694 as a means of financing the war against France. It was a tax on legal instruments (contracts), that required a physical revenue stamp to be impressed or attached to the document to show that the tax was paid and thus the document was legally binding.
Stamp duty was later expanded at various times to cover other types of documents, including playing cards, newspapers, hats and gloves, and precious metals.
SDLT was introduced by the Finance Act 2003. It is not strictly a stamp duty. Instead, it is a self-assessed transfer tax. However, because the previous tax on property transactions was stamp duty, 'stamp duty land tax' must have seemed to be a name containing enough familiarity that most of the electorate wouldn't realise it was a new tax.
In April 2015, Scotland replaced SDLT with a Land and Buildings Transaction Tax, and in 2018, Wales replaced it with a Land Transaction Tax.
When do first-time buyers pay stamp duty?
In England and Northern Ireland, the mechanism for removing or reducing stamp duty land tax for first-time buyers is a 'relief'.
This means that while the tax is still liable, as for any buyer, first-time buyers may find that the relief qualifies them to pay tax at a zero percent rate (i.e. not at all) or a reduced rate for properties within a certain price bracket.
This strategic move is designed to ease the entry onto the property ladder, partly to reduce the financial strain faced by many younger homebuyers of affordability, and partly to keep the market buoyant at lower property price levels.
However, certain situations might still prompt first-time buyers to pay SDLT. These include:
Properties surpassing the threshold: When the property's price breaches the designated threshold, standard stamp duty rates come into play for the excess amount.
Additional property ventures: If a first-time buyer simultaneously acquires a second property, higher stamp duty applies on this Buy to Let residence within the same building.
Purchases by non-UK residents: International first-time buyers might be liable to pay SDLT when buying in the UK.
Usually, the intricate process of calculating and filing for stamp duty falls within the realm of your conveyancing solicitor's responsibilities.
But for those adventurous souls who decide to carry out their own conveyancing, the official HM Revenue & Customs website provides essential guidance and support.
Who qualifies as a first-time buyer?
A first-time buyer, under UK law, is an individual who has never owned a residential property, either in the UK or anywhere else in the world.
First-time buyers are largely self-declared.
Qualifying property types
Residential property on which you can claim relief includes houses and flats, whether freehold or leasehold properties.
Other places where you might live, such as a static caravan, mobile home, or houseboat are not eligible for the relief.
A rule of thumb is that if the property is one that you register at the Land Registry, it may be liable to stamp duty, and therefore a relief might be available.
Joint purchasers
If you're buying a property with someone else, all parties involved in the purchase need to be first-time buyers to claim the stamp duty relief.
Thus, if one buyer has previously owned property, the transaction won't qualify for the relief.
Some common misconceptions
Many believe that if they've inherited a property or were added to the deeds of a property, they still qualify as first-time buyers.
That might be because they are going through the buying process for the first time.
However, this is not the case. Even if you've never purchased a property but have been added to the deeds of one or have inherited one, you wouldn't be classified as a first-time buyer.
Parents who add their children as tenants in common owners to pass on an inheritance during their lifetimes might actually be increasing the tax that their children pay, rather than decreasing it - albeit stamp duty rather than inheritance tax.
Stamp duty rates for first-time buyers in England and Northern Ireland
In 2017, the UK government introduced a generous stamp duty relief for first-time buyers, changing how much stamp duty they might have to pay.
Current rates for first-time buyers
Up to £300,000: Pay no stamp duty
Over £300,000 to £500,000: 5% duty on the amount over £300,000
To give a practical example: If you're a first-time buyer purchasing a property for £400,000, you won't pay any stamp duty on the first £300,000. For the remaining £100,000, you would pay a 5% rate, leading to a stamp duty cost of £5,000.
Properties over £500,000
If the property price exceeds £500,000, first-time buyers will need to pay the normal stamp duty rates, which means they won't benefit from the first-time buyer relief.
How stamp duty is calculated
The rates provided are tiered, meaning you pay different rates on different portions of the property price.
For instance, if you buy a property worth £320,000, you'd pay no stamp duty on the first £300,000 and 5% on the remaining £20,000.
Using a stamp duty calculator
For those keen on getting a precise figure on potential stamp duty costs, a stamp duty calculator proves useful.
These calculators, often provided on conveyancing solicitor websites or government pages, allow you to enter your property's purchase price and get an immediate estimate on the stamp duty you'll owe.
The difference for Buy to Let landlords and second homes
While the relief is enticing for first-time buyers, it's worth noting that if you're purchasing a property as a second home or a Buy to Let, you will be subject to different rates.
Even if it's your first property purchase, the relief doesn't apply if the property won't be your main residence.
Land and buildings transaction tax rates for first-time buyers in Scotland
In Scotland, stamp duty has been replaced by Land and Buildings Transaction Tax ('LBTT').
LBTT differs from its English counterpart both in rates and in relief schemes tailored for first-time buyers.
Definition of a first-time buyer in Scotland
In Scotland, a first-time buyer is someone who has never owned a property in any part of the world and is purchasing their main home.
This definition remains consistent in most circumstances, but it's always recommended to confirm your status with a legal professional or with Revenue Scotland's guidelines.
LBTT rates for first-time buyers
Scotland introduced a relief for first-time buyers in its 2018-2019 budget. For those buying a new home, the initial portion of the purchase price is exempt from LBTT, up to a certain value. Beyond this value, LBTT charges apply at various rate bands. But remember, property purchases have other upfront costs, so ensure you're budgeting wisely.
Up to £175,000 - 0% (LBTT rate for first-time buyers)
Over £175,000 to £250,000 - 2%
Over £250,000 to £325,000 - 5%
Over £325,000 to £750,000 - 10%
Over £750,000 - 12%
For further information on LBTT, including how to claim relief, you might want to visit the Revenue Scotland website.
How to claim first-time buyers LBTT relief
When purchasing your property, your conveyancer or solicitor will typically complete and submit the LBTT return and pay the tax on your behalf. They will also determine if you're eligible for the relief and ensure it's claimed.
However, if you're taking the reins and handling your property transaction, be aware that you can claim the relief yourself during the LBTT return process.
You can always contact Revenue Scotland for advice, but consulting a conveyancer may save you time and help reduce the risk of errors.
Land transaction tax rates for first-time buyers in Wales
Cross the border into Wales, and you'll find that the stamp duty is called Land Transaction Tax ('LTT').
LTT, like its Scottish counterpart, varies in rates and thresholds.
Definition of a first-time buyer in Wales
A first-time buyer in Wales mirrors the definition in Scotland - an individual who hasn't owned property anywhere in the world before and is purchasing their main residence.
For those of you with a history of property ownership, even if it's outside the UK, you wouldn't qualify under this definition in Wales.
LTT rates for first-time buyers
Wales doesn't offer a specific relief for first-time buyers. Instead, everyone benefits from the same rates, but it's worth noting that the LTT threshold is set at a level that benefits many first-time homebuyers.
Up to £180,000 - 0% (LTT rate for all buyers)
Over £180,000 to £250,000 - 3.5%
Over £250,000 to £400,000 - 5%
Over £400,000 to £750,000 - 7.5%
Over £750,000 to £1.5 million - 10%
Over £1.5 million - 12%
For a comprehensive breakdown of LTT rates and further guidance on property purchases in Wales, the Welsh Revenue Authority is an excellent place to start.
Why there's no specific relief for first-time buyers in Wales
Wales chose to offer a higher zero-rate band for LTT, benefiting most property buyers, including many first-timers.
The Welsh government believes that this approach is more equitable, ensuring that both first-time buyers and others purchasing homes at the lower end of the market benefit from tax savings.
What types of mortgages qualify for first-time buyer stamp duty relief?
In 2017, certain adjustments in the stamp duty thresholds allowed an influx of more favourable conditions for first-time buyers.
But, how does your mortgage type impact your eligibility?
Stamp duty on shared ownership properties
First-time buyers choosing shared ownership properties experienced a significant change post-2017.
Shared ownership offers a way to buy a portion of a property and rent the remaining part. It gives some of the advantages of both buying and renting.
The first £300,000 of the property value under shared ownership won't attract duty for first-time buyers. This applies to properties worth up to £500,000. However, remember that the exemption applies to the portion you're buying.
If, later on, you decide to purchase more of the property, the duty thresholds may again come into play. The government's official website can provide clarity on shared ownership schemes.
Stamp duty on properties bought with a mortgage guarantor
If you're leaning towards a mortgage with a guarantor, you might be wondering about stamp duty implications.
Mortgage guarantor schemes assist those with limited deposit amounts (who haven't been able to save for a deposit) or insufficient credit histories.
For first-time buyers, the good news is that having a guarantor doesn't impact your stamp duty exemption rights. You can still claim first-time buyer relief.
However, the guarantor's property holdings can influence eligibility. If your guarantor owns another property, even if you, the buyer, don't, higher rates of stamp duty may apply.
Always discuss the fine print with your solicitor, as taking matters into your own hands can sometimes lead to overlooking nuances in the rules.
How were first-time home buyers affected by the stamp duty holiday?
The COVID-19 pandemic led to the announcement of a stamp duty holiday.
Firstly, during this period, properties up to £500,000 saw no stamp duty charges. This created a level playing field, with both first-time buyers and other property purchasers benefiting equally. Regardless of the type of buyer, everyone enjoyed a stamp duty reprieve until the threshold value.
Secondly, this holiday spurred a notable increase in the property market activity. Many first-time buyers accelerated their property purchasing plans to benefit from this temporary relief. This led to an influx of demand, potentially inflating house prices in certain areas.
Lastly, the end date of the holiday became a crucial marker. If you were buying a property and didn't complete the transaction by the end of the holiday, regular stamp duty rates resumed. Therefore, timing was paramount.
Other stamp duty exemptions
Beyond the first-time buyers' relief, several exemptions might make the buying process slightly lighter on your wallet.
Gifts and inherited property
Receiving a property as a gift or inheriting one from a deceased person's estate often brings a mixed bag of emotions.
In terms of duty, the good news is that such properties generally remain exempt.
However, if there's a mortgage left on the property, and you take it over, you might need to pay SDLT based on the mortgage's value.
Divorce or separation
Divorce or separation comes with a series of legal intricacies.
For properties, if one partner transfers their interest in their home to the other, no SDLT is payable. This relief aims to ease the process, but it's crucial to ensure the property transfer fits the SDLT exemption criteria.
UK government's Multiple Dwellings Relief
Starting from June 2024, the UK government has decided to abolish the Multiple Dwellings Relief (MDR). Before this date, you might have qualified for MDR, if you were planning on buying more than one property at the same time.
Reclaiming overpaid stamp duty
Mistakes happen. If you've paid more stamp duty than you owe, there's a mechanism to reclaim the overpaid amount.
Claims typically need to be submitted within 12 months from the payment date.
Transfers of property in certain business situations
Transferring properties might be a part of a company's restructuring. SDLT might not apply in specific business scenarios. But there are terms and conditions.
In most cases, understanding these exemptions is half the battle. Remember, each exemption has its criteria and intricacies. It might seem tempting to handle all property matters yourself, but tapping into the expertise of a professional, like a solicitor, often proves invaluable. They can ensure you're not overpaying.