Stamp duty reform: the key facts

08 December 2014

The chancellor’s autumn statement included a surprise reform of the stamp duty system. From midnight anyone buying a p

The chancellor’s autumn statement included a surprise reform of the stamp duty system. From midnight anyone buying a property in the UK will face a new set of rules.

What is stamp duty?

Stamp duty land tax, to give it its full name, is a tax you pay when you buy a home. It doesn’t matter if it is somewhere you hope to live or a buy-to-let property. All that matters is how much the property costs. The tax is applied according to what you are paying.

What happened before today

Until now no one paid stamp duty if they were buying a property for less than £125,000.

After that there were five bands:

• Between £125,001 and £250,000 – a 1% charge;

• Between £250,001 and £500,000 – 3%;

• Between £500,001 and £1m – 4%;

• Between £1m and £2m – 5%;

• Above £2m – 7%.

Homes that are registered to companies rather than individuals and cost more than £500,000 have a rate of 15%.

What was wrong with that?

It’s not so much the rates that people were unhappy with but the way the tax was applied. HM Revenue & Customs used a “slab structure”. This meant that if a home falls into a particular band the entire cost of it is taxed at the related rate. So, for example, a house costing £180,000 attracted stamp duty of £1,800 – unlike income tax, the rate is not just applied to the bit above the £125,000 nil rate band.

This meant that there was a big jump in the tax bill when you crossed a threshold. For instance, a home costing £249,000 attracted a bill of £2,490, while one costing £250,001 attracted a bill of just over £7,500. Mortgage lenders and estate agents have long argued that this does strange things to the market, with house prices bunched just below thresholds.

What has changed?

The slab structure has been scrapped and from midnight the tax will be applied like income tax.

There will still be no tax on purchases up to £125,000.

Above that there will be several bands:

• Between £125,001 and £250,000 the rate will be 2%

• Between £250,001 and £925,000 the rate will be 5%

• Between £925,001 and £1.5m the rate will be 10%

• Above £1.5m the rate will be 12%.

On a £300,000 house purchase there would be no tax to pay on the first £125,000, then 2% on the next £114,999 (£2,300) and 5% on the last £49,999 (£2,500). That’s a total £4,800 compared with £9,000 under the previous system.

Is this good news for everyone?

Everyone buying a house costing less than £937,000, says the Treasury, or about 98% of households. Anyone spending more will face a higher bill. If you are spending £2.1m on a home you will pay £165,750 under the new regime versus £147,000 previously.

How much will this cost?

The chancellor said it represented a tax cut of £800m a year. In 2013-14 the Treasury took £6.45bn from the tax, an increase of 74% on the 2003-04 figure, despite there being fewer transactions. Sales in London accounted for £2.7m of tax revenue, and since 2008-09 tax take from the capital grew by more than 200%

How does this compare with the changes in Scotland?

The lowest rate of tax kicks in earlier, but after that it is much more generous. In Scotland from April 2015 stamp duty is being replaced by Land and Building Transaction Tax (LBTT), which will be applied like income tax. There will be a tax-free allowance of £135,000 on each transaction. Above that there are three bands:

• Between £135,001 and £250,000 the rate is 2%;

• Between £250,001 and £1m it is 10%;

• Above £1m the rate is 12%.

A house sold for £300,000 would attract tax of 2% on £114,999 and 10% on the top £49,999 – £7,300 in total. That’s less than under the old stamp duty rates but more than in the rest of the UK. Homebuyers spending less than £325,000 will be better off under the new system, while those spending more will be taxed more highly than currently.

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