Stamp Duty Land Tax is a fee you pay to the taxman, providing the price you are paying for your property is more than £125,000.
Before the 2014 Autumn Statement in December it was charged in bands from £125,000 upwards between 1% and 7% depending on the value of the property.
But after much criticism, the system has been replaced and buyers will only be levied progressively above thresholds, in a similar way to how income tax works.
How stamp duty works
Until 1997, 1% tax was charged when buying properties over £60,000. But chancellor at the time saw the increasing revenue opportunities as house prices climbed, and so introduced the percentage band idea.
Stamp duty was previously paid on the whole value of a property, until December 2014. Therefore, you would have paid 0% on properties costing 0 – £125,000, 1% paid on properties costing between £125,000 and £250,000, 3% between £250,000 and £500,000 and 4% for anything above £500,000.
Unsurprisingly, this created a sudden leap in bills at each of the thresholds. If you purchased a property costing £251,000, you would pay £7,530, not just the amount over the threshold as you would do with income tax. This jump meant if your property costs £250,000 you will pay £2,500, if it costs £250,001 you will pay £7500.03.
Considering the amount of income it generates politicians have been reluctant to alter the charges, but in the past there have been stamp duty holidays for first-time buyers or in certain bands.
However, the changes in the Autumn Statement mean most buyers will pay less stamp duty.
As of December 4 2014, bands have changed to 0% up to £125,000; 2% to £250,000; 5% to £925,000; 10% to £1.5million and 12% above that.
So those buying a £200,000 home will now pay £1,500, when previously they would’ve paid £2,000. The big win though is for those previously caught in the 3% tax band; someone who would’ve been hit with an £8,250 bill on a £275,000 home will now pay £3,750.
With the new system, only those buying homes costing more than £937,000 will face a bigger tax bill.
A history of stamp duty
Stamp duty is an unpopular tax, mainly due to soaring house prices in previous years and the nature of how it is charged.
The slab system was introduced by Gordon Brown, when he was Chancellor. Before this, stamp duty was charged at a flat rate of 1% above £60,000. This was changed to 1.5% above £250,000 in 1997 and 2% above £500,000 and then 3% above £250,000 and 4% above £500,000 in 2000.
Since then the higher thresholds have failed to keep up with house price inflation. If they had kept pace with property prices as measured by the Nationwide index, the £250,000 threshold would now be at £787,500 and the £500,000 threshold would stand at £1,575,000.
In recognition of the rising house prices and its impact on first-time buyers struggling to get on to the property ladder, in March 2005 the threshold was raised by the Government from £60,000 to £120,000. The threshold was later raised again to £125,000 in 2006 – roughly in line with annual house price inflation from 2005 – 2006. However, experts criticised this small rise, pointing out that the cost of homes being held just below the threshold would simply rise from £120,000 to £125,000 and it would be counter-productive.
The new changes mean 98 per cent of buyers will pay less. Bands are now 0% up to £125,000; 2% to £250,000; 5% to £925,000; 10% to £1.5million and 12 per cent above that.
After the changes to stamp duty in 2003, purchasers were no longer required to submit documents providing details of the purchase to the Stamp Office for stamping. Instead, their solicitor or licensed conveyancer asks them to sign a Land Transaction Return form, which contains all the information needed.
But the new form was far more complex than the previous document and was designed to clampdown on people claiming to pay more for fixtures and fittings, which previously would have brought the cost of the home below a certain threshold.
Instead of the previous Particulars Delivered form, which consisted of a single page asking for the very basic details, the new form introduced was six pages long and has seventy questions. Once completed, it must then be sent to HMRC. The Land Registry will not register ownership until it has a certificate from HMRC confirming that the form has been received.
Avoiding stamp duty
The new form was designed to discourage homebuyers from artificially keeping a price just below the £250,000 threshold by indicating they are paying less for the property but extra for fixtures and fittings. The new form allows the taxman to examine a sale carefully and continue to investigate it for up to nine months afterwards.
Tax experts have advised the main target of the change was businesses rather than individual buyers, but any property sold for just under £250,000 with a large sum of fixtures and fittings added on may be looked at more closely.
Post courtesy of This is Money.