For better or worse, former chancellor Kwasi Kwarteng’s recent mini-Budget included many new policy announcements. While many of the plans he announced have now been scrapped, changes to the thresholds at which Stamp Duty is paid remain in place.
Stamp Duty was introduced in 1694 to fund England’s conflict with France during the Nine Years’ War.
Back then, the levy had unintended consequences – it eventually led to the “no taxation without representation” movement in North America that birthed the US War of Independence.
At its inception, the transaction tax was raised against many different goods and services, ranging from hats to newspapers. These days, Stamp Duty is a tax you could be liable for when you buy a residential property in England or Northern Ireland. Wales and Scotland have similar property taxes.
The changes introduced in the mini-Budget have altered the Stamp Duty thresholds, but what do these mean for you? And how could your finances be affected by the changes? Well, continue reading to find out how the cuts could potentially make a difference if you’re buying a residential property.
Stamp Duty is a transaction tax charged when you purchase property
As mentioned, the Stamp Duty Land Tax (SDLT) is a tax you typically pay when you purchase a residential property.
It’s worth keeping in mind that you will only pay SDLT if you’ve purchased a property in England or Northern Ireland. If you buy a property in Scotland, you’ll potentially pay “Land and Buildings Transaction Tax” (LBTT) while, in Wales, it’s simply called the “Land Transaction Tax” (LTT).
SDLT is a progressive tax that has several bands. The amount of tax you pay is determined by the amount of the purchase price that falls within each tax band.
Before the announcement of the mini-Budget, the threshold for paying SDLT was £125,000. This means you could purchase a property for less than £125,000, and you wouldn’t be required to pay SDLT.
The changes from the mini-Budget saw the £125,000 threshold increase to £250,000. You now won’t pay any tax on the first £250,000 of a residential property purchase, and the portion between £250,001 and £925,000 is taxed at 5%.
Then, between £925,001 and £1.5 million, you will typically be taxed at 10%, and you’ll pay 12% SDLT on the portion over £1.5 million.
Here are the new Stamp Duty rates.
|
Old Stamp Duty rules |
New Stamp Duty rules |
|
|
£0 – £125,000 |
0% tax |
0% tax |
|
£125,001 – £250,000 |
2% tax |
0% tax |
|
£250,000 – £925,000 |
5% tax |
5% tax |
|
£925,001 – £1.5 million |
10% tax |
10% tax |
|
£1.5 million + |
12% tax |
12% tax |
So, to give an example, imagine you purchase a house for £350,000. The first £250,000 isn’t taxed, but you will face a 5% charge on the portion from £250,001 and £350,000, meaning the total amount of SDLT you would now pay on a £350,000 property would be £5,000.
Prior to 23 September you’d have paid £7,500 SDLT on a £350,000 purchase, so the change in threshold means you’ll save £2,500.
The good news is, if you’ve just recently purchased a new property, the SDLT changes should apply. This is because the changes came into force immediately after the mini-Budget was announced.
You should remember that if you’re buying a second home, you’ll be required to pay an extra 3% in SDLT on top of standard rates if buying your new property means you’ll own more than one home.
In response to the changes in SDLT, the Welsh government have also made changes to LTT.
The threshold at which LTT falls due has been raised from £180,000 to £225,000. In addition, you will now pay a rate of 6% on the portion between £225,000 and £400,000.
Previously, you paid a rate of 3.5% between £180,000 and £250,000, then 5% on the portion between £250,000 and £400,000.
As yet, no changes have yet been made to Scotland’s LBTT.
First-time buyers will also be affected by the changes
Those buying a second or third property aren’t the only ones affected by the SDLT threshold increases, as changes have also been made for first-time buyers.
Indeed, the minimum threshold has been increased from £300,000 to £450,000 for first-time buyers. So, if you’re a first-time buyer in England or Northern Ireland paying less than £450,000 for a home, you won’t pay any SDLT.
Then, first-time buyer relief will be applicable on properties worth up to £625,000, a significant rise from the previous value of £500,000.
For example, imagine you purchased a property as a first-time buyer worth £500,000. Under the old rules, you wouldn’t be taxed on the first £300,000, and the portion between £300,001 and £500,000 would be taxed at 5%, which would result in an SDLT charge of £10,000.
Now, with the new rules in place, you wouldn’t be charged on the first £425,000 of the total value of the property, then 5% on the remaining £75,000, which would result in a total SDLT charge of £3,750.
So, thanks to the new first-time buyer Stamp Duty rules, you would pay £6,250 less SDLT when you buy a £500,000 property.
|
Rules before 23 September 2022 |
Rules after 23 September 2022 |
|
|
£0 – £300,000 |
0% |
0% |
|
£300,001 – £425,000 |
5% tax |
0% |
|
£425,001 – £500,000 |
5% tax |
5% tax |
|
£500,001 – £625,000 |
First-time buyer’s relief won’t apply |
5% tax |
|
£625,001 + |
First-time buyer’s relief won’t apply |
First-time buyer’s relief won’t apply |
The response to the Stamp Duty cuts has been mixed
While you may initially think that having to pay less when you purchase a property in England or Northern Ireland is a good thing, the response to the cuts has, so far, been mixed.
Some experts have stated that the changes will ease cost pressures on buyers in the short term. Though, others are saying that while it may provide a quick fix to cost pressures on a short-term basis, it could cause house prices to spike in the long term.
This is because the real problem with the housing market in the UK is a lack of supply, not that prices are deterring buyers.
In fact, Sky News reports that, over the last decade, almost half of all areas of the UK have had a shortfall in house building.
Despite this, the changes could potentially be fantastic for first-time buyers. As many first-time buyers now won’t have to pay any SDLT, you may be able to purchase the home of your dreams and save thousands in tax.
Get in touch
If you’re looking to buy a house and would benefit from expert advice, please email enquire@london-money.co.uk or call (0207) 808 4120.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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