In this section you will understand when you are liable to pay stamp duty. Generally speaking, anybody purchasing land or property is liable to pay stamp duty up to the rate of 4% on the purchase price of the property.
When Do Property Investors Pay Stamp Duty?
The two most common scenarios when property investors are liable to pay stamp duty are when
a) land or property is purchased where the purchase price is above £125,000;
b) land or property is transferred where the mortgage amount is greater than £125,000.
Having witnessed sharp property price increases over the past few years, the government decided to increase the exempt stamp duty threshold from £60,000 to £125,000. This is because it was becoming increasingly unlikely that you would be able to avoid paying stamp duty.
The following table provides details of the current rates of stamp duty.
Purchase Price or Outstanding Mortgage Value
Up to £125,000
Greater than £500,000
Stamp duty when buying new land or property
When purchasing land or property, you will be liable to pay stamp duty before you have completed the deal. Typically, the solicitor acting on your behalf in the transaction will include this tax liability in his final invoice to you.
Case Study - 1 : Stamp Duty When Buying Land
Haleema goes to an auction and successfully manages to acquire a small plot of land for £165,000.
She is liable to pay stamp duty at a rate of 1% o this land.
This means that she a stamp duty tax liability of £1,650.
Case Study - 2 : Stamp Duty When Purchasing a New Property
Howard takes his first step onto the property ladder by moving out of his parent’s home.
He buys a property for £210,000.
The solicitor acting on his behalf calculates that the stamp duty liability is £2,100. He includes this charge in the final invoice that he sends to Howard.
Stamp duty when transferring a property
What a lot of investors fail to realise is that if you transfer ownership of a property to another party (including husband/wife), then stamp duty will be liable if the property is mortgaged and the mortgage amount being transferred is over £125,000.
If the property is not mortgaged and ownership is being gifted, then there is no stamp duty liability.
Case Study - 3 : Stamp Duty When Transferring Property
This case study continues from the previous case study, where Howard has now purchased his property and already incurred a charge of £2,100 in stamp duty.
Two years after the purchase, he marries his long-term girlfriend Betty. He decides to move the property into joint names, where they will have equal 50:50 ownership of the property.
The outstanding amount on the mortgage at the time of transfer is £200,000. By transferring the mortgage into joint names, Betty will not be liable to pay any additional stamp duty tax as the transferred amount of £100,000 (her 50% share) is below the £125,000 stamp duty threshold.
Stamp Duty Exemption for Deprived Areas
If you are a budding property investor looking to invest in areas of regeneration, then you may well benefit from having no stamp duty liability when buying a property.
This is because the Inland Revenue has designated over 2,000 deprived areas throughout the UK as being exempt from stamp duty. If you purchase a property in one of these areas, then you will not have to pay stamp duty, unless the purchase price exceeds £150,000.
The Inland Revenue states that
‘The areas that qualify for the relief are the most deprived, as determined by the indices of deprivation in each of the four nations that comprise the United Kingdom. In England and Scotland the poorest 15% of wards and post codes qualify. In Wales and Northern Ireland the poorest 42% of wards are designated as disadvantaged.’
If you want to check whether a property you are considering purchasing is in a disadvantaged area, click on the link below to use the disadvantaged areas relief search tool.
Stamp Duty Loophole Closed
It was only a matter of time before the Inland Revenue closed a stamp duty loophole that so many people have been using for many years.
The loophole was that homebuyers and property investors would pay over the odds for fixtures and fittings in a house.
This was done to bring the cost of the actual house purchase down so that stamp duty could be dramatically reduced.
Here is a case study to demonstrate what people have been doing.
Case Study - 4 : Avoiding Stamp Duty
John sees a property advertised for £270,000. He loves the house and wants to buy it. The vendor accepts his offer of £265,000. However, this price means that he will have to pay £7,950 in stamp duty tax (i.e., stamp duty is due at a rate of 3%).
He is also interested in buying some fixtures and fittings, which are valued at £2,000. This means that he owes the vendor a total of £267,000.
However, he agrees with the vendor that he will pay £18,000 for the fixtures and fittings.
Therefore he will now only pay £249,000 for the house.
By doing this, John has brought himself into a lower stamp duty tax band and is now only liable to pay £2,490 in stamp duty tax.
This means that he has saved £5460 in stamp duty tax!
In the case study you can see how easily John was able to make a huge tax saving.
Inland Revenue anti-avoidance measure
Stamp duty rules and regulations have changed from 1 December 2003.
Homebuyers will now need to complete a self-assessment land transaction return form and send it to the Inland Revenue. The form will give full details of the sale of the property.
This means that the Inland Revenue will now know exactly how much was paid for the house and its fixtures and fittings, etc. This in turn means that the Inland Revenue will be scrutinising very, very closely all transactions that occur around the stamp duty threshold levels.
Also, the Inland Revenue will be able to investigate the sale for up to 9 months after the filing date of the return, which is 30 days after the transaction.
This means that you may well end up with an unexpected tax bill if they become suspicious of any transactions! Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA), says that
‘Over time thousands of homebuyers whose property was sold for a figure close to a stamp duty threshold may find that the sale comes under the microscope.’
So, think twice before you consider using the old stamp duty avoidance method!