How Does Stamp Duty Work?

Stamp duty can be a bit of an annoying extra cost to consider when investing in the UK property market, however, there are ways you can avoid it.

What Is Stamp Duty?

According to gov.uk, the current Stamp Duty Threshold  is £125,000 for residential properties and £150,000 for non-residential land and properties. (1)

This means that if you purchase a residential property for less than £125,000, you won’t have to pay any stamp duty at all.

If you were going to buy a residential property for around £300,000, you wouldn’t pay tax on the first £125,000 but you would need to pay tax on the remaining £175,000. This could cost around £5,000 in tax.(2)

When thinking about buying a property you should make sure you take into account any extra costs such as stamp duty which might increase the total value of your investment.

For off plan developments, you are required to pay stamp duty within 30 days of the project being complete. If you decide to move into the property before it has been finished, the 30 days will commence from the date you moved in.

Stamp Duty Shake Up

In 2014, stamp duty was changed to only apply to the amount of the purchase price that falls within the particular duty band, making it more like income tax. The new regime, outlined below, has meant that some people are now paying a lot less for their property, however, those buying properties in the highest duty band are facing considerably higher rates. (3)

Stamp Duty 2014 Shake Up

The new bands and rates:

Up to £125,000: 0%

£125,001 - £250,000: 2% 

£250,000-£925,000: 5%

£925,001 to £1.5m: 10%

Above £1.5m: 12%

However,  stamp duty is set to rise in April 2016. To find out more about the proposed changes, click here.

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Former Council flats in London are now selling for upward of 1 million pounds, with some terraced houses starting from 1.2 million. These investment opportunities are being described as a gold mine for landlords, as the average rent for such a property can be as high as £400 a week for a one bedroom terraced property. (4)

For those looking to snap up a property in London, you will also need to pay the new higher stamp duty rates on the remaining cost of the purchase after £125,000. This can often mean paying 4.38% in tax, which for a 1 million pound property can be over £43,750. (5)

The increase in stamp duty introduced in 2014 has meant that many homeowners in London trying to sell their property are being forced to reduce the asking price to attract interest from investors.This has apparently also affected the international investment market who are being put off by extra expenses, on top of already expensive asking prices. (6)

How Can You Avoid Stamp Duty?

There are some circumstances where you are able to avoid expensive stamp duty tax.

If you are looking to expand your property portfolio, by investing in smaller buy-to-let residential homes under the £125,000 mark, you could avoid paying stamp duty altogether.

If you plan to leave a property to your children, by reducing the price of the property by say £40,000 off the asking price, you can reduce the amount of stamp duty you will need to pay, as the reduction in price is considered as a gift. Moreover, by selling the property to your children, you can avoid adding on any extra charges for agency fees which again takes the total asking price of the property down further. (7)

Moreover, Stamp Duty relief is also obtainable on the Government Right to Buy incentives. Any Stamp Duty will be calculated on the discounted price you pay for the property, rather than the market value of the property, helping first-time buyers to get a foot on the property ladder. (8)

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Stamp Duty Loophole Revealed

An offshore company has recently revealed a Stamp Duty loophole which can help those looking to buy properties for over 1 million pounds avoid paying the tax completely.

The company has developed a stunning Grade 11 listed home valued at £8.95 million, but instead of selling the property as one of the company’s assets, has decided to sell the firm, which owns the property. By selling the firm, the buyer can avoid paying a massive 1 million pounds in Stamp Duty, however under the Annual Tax on Enveloped dwellings, this home will incur a bill of approximately £54,450 per year. (9)

Property investors both in the UK and overseas should consider diversifying their property portfolio with a number of high rental yield HMO properties to keep Stamp Duty to a minimal and get a good return on their investment. To speak to one of our property investment experts please call: 01942 251949

Sources:

1. GOV UK - Stamp duty land tax overview

2. Which - What is stamp duty?

3. BBC - Stamp duty changes: How will they work?

4. The Guardian - Ex-council flat in central London sold for record £1.2m

5Money Saving Expert - Stamp duty

6. Evening Standard - Price of £1m plus London homes slashed amid George Osborne’s stamp duty shake-up

7. Telegraph - 'I'm buying my parents' house

8. Love Money - How to beat stamp duty

9. Mirror - Estate agent finds loophole stop


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