Stamp duty may not be the most exciting topic in the housing market, but it can make quite a difference to how much you end up paying for your home. Here’s a brief guide to what it is, how it works, what that means in practice and what the future might bring.
Stamp duty is actually a shorthand for different taxes
In England and Northern Ireland, Stamp Duty means Stamp Duty Land Tax and there is an online calculator here. In Wales, it means Land Transaction Tax and there is an online calculator here. In Scotland, it means Land and Buildings Transaction Tax and while this in no official calculator, you can find the current rates listed here.
Stamp duty works along essentially the same lines in all parts of the UK, but the bands are different (plus they are subject to change), hence you always need to check the rates in force at the time of your intended purchase and in the location of your intended purchase.
You should also be aware that different rates of tax may apply depending on what kind of purchase you are making, e.g. a first home, a main home (but not your first home) or an additional home.
How and when you pay stamp duty
From a buyer’s perspective, the process itself is actually quite easy. You just send the money to your solicitor and they send it on to HMRC when the property completes.
What stamp duty means in practice
In simple terms, you need to work out if you are due to pay stamp duty (if you are a first-time buyer you may not be) and if you are then you need to work out how you are going to pay it.
Basically, the two approaches are either to add it to your mortgage or to pay it out of your cash savings. In either case, you would need to meet the appropriate lending criteria regarding Loan To Value ratio (LTV) and affordability. You would also have to accept the fact that either way you are going to impact your LTV ratio and this may impact your ability to get the very best deals.
Having said that, while mortgages are sold as long-term products, there is absolutely nothing to stop you re-mortgaging at a later date when you have built up equity in your home and this fact may be enough to prevent you from needing to as it may encourage your lender to agree to negotiate an improved rate in acknowledgement of your improved situation (re the LTV ratio and possibly increased income as well).
For the sake of completeness, the example of stamp duty is a good reminder to think about all the possible transaction costs involved in buying a home and the importance of making sure that you have funds to pay them.
The future of stamp duty
Interestingly, there are proposals to switch stamp duty to a tax paid by the seller.
The argument behind this change is that people who are moving from smaller homes to larger ones would pay stamp duty on the smaller home (they are selling) rather than the larger one they are buying, while people moving into smaller homes will be paying less for the property they are buying.
This may sound good in theory, however, it’s hard to see what would deter sellers of any description from simply incorporating the cost of the stamp duty into the sales price of the property. If they did so, then, rather ironically, the buyer (who is the person ultimately paying for the property) might end up paying more as the property could be pushed into a higher stamp duty band, so you’d effectively be paying stamp duty on the stamp duty.
Your property may be repossessed if you do not keep up repayments on your mortgage.
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