How to Avoid Stamp Duty
Updated on Monday 23 November 2020
Contents:
What is stamp duty?
Stamp Duty Land Tax (SDLT) is a tax that you must pay if you are buying or exchanging a property or land in England and Northern Ireland. In Scotland there’s the Land and Buildings Transaction Tax, and in Wales Land Transaction Tax, each with a similar structure but different rates to SDLT.
Like most taxes, there are thresholds under which you don’t have to pay, and different bands increasing the tax for the more expensive properties.
Why do we pay stamp duty?
Stamp duty has its origins in England from 1694, during the coregency of King William III and Queen Mary II. This transaction tax was created to raise money for the war with France and has remained in place ever since.
After all, no sensible government dismisses a useful tax, and though over three hundred years later we are no longer at war with France (and haven’t been for more than a century), we still pay the stipend!
And why is it called ‘stamp duty’? Because you used to have to get your documents officially stamped, and until the tax (duty) was paid, they wouldn’t stamp it. Of course, now everything is electronically processed, but the name remains.
Do I have to pay stamp duty?
Everyone purchasing a property must legally pay the stamp duty that applies. The property transactions triggering a payment of SDLT are as follows:
First time buyers
Stamp duty for first-time buyers is significantly reduced, with a full exemption on property worth £300,000 or less. The full details are:
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No stamp duty on property up to £300,000
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5% tax on amounts £300,001 to £500,000
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No exemption if the property is worth more than £500,000
At current rates (2019/20 year), this equates to a saving of £5,000 in SDLT on a property worth £300,000 to £500,000.
How much is stamp duty? If, as a first-time buyer, you were to buy a property worth £400,000, your total tax owed would be £5,000. This is calculated as follows:
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No SDLT for the first £300,000
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5% tax for the next £100,000 = £5,000
Once the property value reaches half a million pounds, the stamp duty exception for first time buyers is lost, leaving them with the same stamp duty to pay as anyone else.
Buying your main home
When buying your main home, standard SDLT is as follows:
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No stamp duty for the first £125,000
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2% tax for the amount between £125,001 and £250,000
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5% tax for the amount between £250,001 and £925,000
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10% tax for the amount between £925,001 and £1,500,000
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12% tax for all value above £1,500,000
For a property costing £650,000, the SDLT would be £22,500. This breaks down to:
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£0 for the first £125,000 of value
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£2,500 for the second £125,000 (up to £250,000)
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£20,000 for the remaining £400,000 (up to £650,000)
Buying a second property or buy-to-let
Stamp duty on second homes (including buy-to-let properties) is increased by 3% per band and the exemption on properties up to £125,000 is removed.
However, houses under £40,000 are always completely exempt from stamp duty.
The rates are as follows:
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3% tax for the first £125,000
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5% tax for the amount between £125,001 and £250,000
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8% tax for the amount between £250,001 and £925,000
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13% tax for the amount between £925,001 and £1,500,000
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15% tax for all value above £1,500,000
A £1,140,500 house bought as a second property would incur a staggering £92,015 in stamp duty land tax.
When do you pay stamp duty?
You now have 14 days to pay the stamp duty once the transaction to purchase a property has been made (stamp duty changes in March 2019 cut the previous 30 days to two weeks). In many cases you can add the value of the stamp duty to the mortgage, increasing the loan to make sure you have the money to cover the tax.
Typically, your solicitor will organise the payment of the stamp duty.
Can stamp duty be paid in instalments?
You can delay the stamp duty for up to 12 months in some cases, but 10% of the duty will be added as an additional levy for the delay. If you are struggling to pay and didn’t have the amount added to the mortgage, you may want to use a credit card or personal loan to cover the tax.
Learn more: How to Cut the Cost of a Loan
What happens if you don’t pay stamp duty?
The penalties for stamp duty avoidance are high and in extreme cases could be as much as half the original SDLT owed – plus VAT!
As with all taxes, avoidance is difficult.
How to avoid stamp duty on a house purchase
The big question, of course, is with a tax that high, it is possible to legally avoid stamp duty?
This is a bit of a grey area. Some conveyance solicitors are willing to use some loopholes to lower the amount of stamp duty – called stamp duty mitigation schemes, but they are frowned upon and if you put a foot wrong, moving you out of a legal loophole but into true tax avoidance, then HMRC will investigate, fine and even prosecute as a result.
There are online firms who will advertise that they can save you in stamp duty but using their services should be considered very high risk and it is usually preferable to simply pay the dues - especially as the charges for their services could be as much as 50% of the savings themselves.
In the interest of understanding, however, here are the two main stamp duty mitigation schemes.
Separating fixtures and fittings
Legally, paying stamp duty is only required on the property and land themselves, not on the things inside the house. However, a house price typically includes the fixtures and fittings, such as kitchens and bathrooms.
By separating the cost of the fixtures and fittings from the cost of the building itself, and paying for them as two distinct purchases, the stamp duty only counts to the latter.
It is very important, if you do intend to apply this principle, that you do not inflate the cost of the fixtures and fittings. This will very quickly show an intent to avoid the stamp duty land tax and will have dire consequences.
Transferring the property in sections
The legal writing of stamp duty dictates that it is only due on transfers of land and property ‘substantially performed’. By splitting the purchase into sections, it isn’t until the final chunk is bought that ‘substantially performed’ is arguably in force, and thus the stamp duty is only due on that final section value.
Again, this technique is well known by HMRC and if it is seen to be a means to tax evasion, the penalties will swiftly be applied.
How to reclaim stamp duty – Getting a stamp duty refund
We discussed earlier that, when buying a second property, you are required to pay an additional 3% per band towards your stamp duty.
In some cases, you may be able to get a refund on this additional 3% charge – but only in specific circumstances. If you pay the higher rate tax duty on a second property, but end up selling the first property within the next 3 years, HMRC will refund you the extra 3% that you paid.
For example, if:
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You lose your buyer – but do not want to miss out on your dream home, you might decide to go ahead with the purchase and put your other property back on the market.
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You are going through a divorce – you might need to purchase a new property before moving out of the one you shared with your partner.
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Your spouse’s property is taking longer to sell – if you are moving into a new home with your spouse, one of you may take longer to sell than the other meaning that you could have 2 properties in your name.
Be warned, though, that you only have 3 months to reclaim stamp duty once you have eventually sold it. You can apply for a refund by filling out a HMRC stamp duty refund form on the government website, or contacting HMRC directly.
Full stamp duty exemptions
There are a few cases where legally, stamp duty is 100% exempt. These are:
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Passing on a property as part of a will
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Transference of deeds as a gift
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Transferring property to an ex-spouse as part of a divorce settlement
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