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Stamp Duty Explained

By: Louise Smith, barrister - Updated: 8 Feb 2013 | comments*Discuss
Stamp Duty tax stamp Duty Land Tax

History of Stamp Duty

Stamp Duty is a tax paid on the documents which transfer property from one owner to another. Originally this involved physically attaching stamps, to the value of the tax, to the document. Without the stamps the document, and therefore the transaction, was not valid.

Stamp Duty was first introduced in the United Kingdom in 1694 to fund a war against France. Initially intended to be in place for only four years, Stamp Duty proved to be such an easy and profitable tax for the government that it was never abolished.

Rarely popular with the people, Stamp Duty led to the notorious Boston Tea Party and ultimately the American War of Independence.

Stamp Duty Today - Stamp Duty Land Tax

Today "Stamp Duty" is still payable on certain transactions - particularly on the purchase of land or shares. Since 1st December 2003 the Stamp Duty payable on the purchase of land became known as Stamp Duty Land Tax. However, this is still popularly referred to as Stamp Duty. In legal terms land includes houses, flats or other buildings on land and is also known as real property.

Who has to Pay Stamp Duty?

Since 2006 Stamp Duty has been payable on the purchase of any property worth more than £125,000. With the average house price being over £220,000 as at February 2008, the majority of buyers will pay Stamp Duty on their purchase.

For residential properties in "designated disadvantaged areas" Stamp Duty is not payable if the purchase price is £150,000 or less. A list of designated areas and the specific requirements for eligibility is available from Her Majesty's Revenue and Customs (HMRC).

Since 1st October 2007 "zero carbon homes" became exempt from Stamp Duty if they cost less than £500,000. Such properties over £500,000 are eligible for a reduced rate of Stamp Duty. Very strict rules apply to these properties and, again, details of eligibility are available from HMRC.

In the 2008 Budget relief from Stamp Duty was announced for purchasers who buy 80% of the value of their property under a government shared ownership scheme.

Calculating Stamp Duty

The amount of Stamp Duty that has to be paid depends on the purchase price of the property. Stamp Duty is calculated as a percentage of the total purchase price as follows:
  • Properties for £ 125,001 to £250,000 - Stamp Duty is 1% of purchase price;
  • Properties for £ 250,001 to £500,000 - Stamp Duty is 3% of purchase price;
  • Properties for £ 500,001 to £1,000.000 - Stamp Duty is 4% of purchase price;
  • Properties for £1,000,001 to £2,000.000 - Stamp Duty is 5% of purchase price;
  • Properties over £2,000,001 or more - Stamp Duty is 4% of purchase price.

The Burden on First Time Buyers

For years purchasers of lower value properties, including many first time buyers, did not have to pay Stamp Duty because the purchase price was lower than the starting band. The Council of Mortgage Lenders recently stated that the money raised by the government from Stamp Duty had increased by 900% between the financial years 1985/86 and 2003/04. Arguably this is because the Stamp Duty price bands have not kept in line with property prices.

The price at which Stamp Duty is payable has been raised from £60,000 to £125,000 since 2005, theoretically easing the burden on first time buyers. However, in March 2008, one of the country's largest mortgage lenders stated that first time buyers paid Stamp Duty in 99% of local authorities in the South of the country and 42% of those in the North. In Greater London first-time buyers were paying Stamp Duty at one of the higher rates in 62% of London Boroughs.

Paying Stamp Duty

Anyone purchasing a property must fill in a Stamp Duty Land Tax return. The requisite form - in the case of most residential property purchases this will be the SDLT1 - can be obtained by telephoning HMRC Stamp Taxes helpline. Each form carries a unique identification number and therefore copies cannot be used. Notes on filling in the return are available in form SDLT6 . The purchaser must state:
  • the date of the purchase;
  • the price of the property; and,
  • the amount of Stamp Duty payable on the purchase.
The form is returned to HMRC Stamp Taxes together with payment for the Stamp Duty. Once the form has been received and the information verified, HMRC send back a Revenue certificate which can then be used by the purchaser to register their ownership at the Land Registry. Whilst HMRC encourages online filing of Stamp Duty Land Tax Returns, the system is currently aimed at professional users rather than purchasers completing the process themselves.

The SDLT return AND payment for any Stamp Duty due must be received by HMRC within 30 days of the purchase date otherwise the return is deemed to be late and the purchaser may become liable for interest and penalties.

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