How the stamp duty holiday can benefit you​

Stamp Duty Savings
Stamp Duty Savings

After a slump in the housing market following the coronavirus pandemic, a new stamp duty holiday has been announced. It helps buyers by increasing the normal threshold for stamp duty from £125,000 to £500,000. Rishi Sunak, Chancellor of the Exchequer, has announced this tax break in a bid to stimulate the housing market and boost the economy. House prices have continued to fall over the last few months and this financial break gives people an increased incentive to start buying property again. Here, we’ve detailed what the stamp duty holiday means and how it can benefit you.

What is stamp duty?

When you buy either a freehold or leasehold property in the UK, you pay a tax called stamp duty. This is due regardless of whether you pay cash or use a mortgage to pay for your property. It varies across the UK but in England and Northern Ireland, Stamp Duty Land Tax (SDLT) is levied. The amount you actually pay depends on your location within the UK, the price of your property and your situation, such as being a first-time buyer or a landlord.

According to HM Revenue and Customs, the government takes about £12 billion in stamp duty each year.

How stamp duty is usually calculated

If you have previously bought a home, you are liable to pay stamp duty when purchasing a property or land for more than £125,000. The first £125,000 is exempt from stamp duty but then the rates apply in bands:

  • £0–£125,000: 0%
  • £125,001–£250,000: 2%
  • £250,001–£925,000: 5%
  • £925,001–£1.5 million: 10%
  • Above £1.5 million: 12%

The average cost of buying a property in the UK is £232,000. This means you have to factor in an extra £2,140 for stamp duty to your costs when making your purchase.

For example, if you bought a property in Bexley for £280,000, you would have to pay £4,000 in stamp duty. Here’s the breakdown:

  • 0% tax due for £125,000: £0
  • 2% tax due for the next £125,000: £2,500
  • 5% tax due for the last £30,000: £1,500
  • Total stamp duty to be paid: £4,000

First-time buyers

The stamp duty liability doesn’t apply in the same way to first-time buyers, who normally benefit from purchases of up to £300,000 without paying stamp duty. If first-time buyers make a purchase between £300,001 and £500,000, a 5% charge is made against the relevant portion. The usual rates apply for purchases above £500,000.

Second homes and buy-to-let properties

If you’re buying a second home, the threshold is reduced from £125,000 to £40,000. You are liable for an extra 3% stamp duty as well as the normal rates. If you’re a landlord investing in a buy-to-let property, you also have to pay an extra 3% in stamp duty.

What does the stamp duty holiday mean?

The announcement made on 8th July 2020 confirmed that the SDLT rates on residential property purchases will be reduced until the end of March 2021 with immediate effect. The new threshold has been increased to £500,000, which offers a huge amount of financial relief for buyers.

This move is intended to stimulate the housing market by encouraging people to purchase properties. In turn, this will boost the economy by promoting related business, such as using removal firms, builders and decorators as well as buying furniture and garden supplies, for example.

The temporary stamp duty rates

This temporary stamp duty holiday means that if you buy a residential property between 8th July 2020 and 31st March 2021, you don’t have to pay stamp duty on a purchase price of up to £500,000. The new SDLT bands are:

  • Up to £500,000: 0%
  • £500,001–£925,000: 5%
  • £925,001–£1.5 million: 10%
  • Above £1.5 million: 12%

The stamp duty holiday is also good news for those buying a second home or a buy-to-let property. Only 3% stamp duty (instead of an additional 3%) is due for prices up to £500,000 and an additional 3% on the normal rates above this amount, as detailed below:

  • Up to £500,000: 3%
  • £500,001–£925,000: 8%
  • £925,001–£1.5 million: 13%
  • Above £1.5 million: 15%

A good incentive to buy

As a comparison with the earlier example, if you are now ready to purchase a property in Bexleyheath for £280,000, you no longer have to pay any stamp duty and are £4,000 better off than if you’d made your purchase before the stamp duty holiday came into force.

This tax break is, therefore, a great incentive to buy property, provided you complete on your purchase by 31st March 2021. Aiming to save you and other buyers thousands when purchasing properties, this stamp duty holiday should quickly revive the currently flagging property market.

As a first-time buyer, the removal of having to pay stamp duty on a purchase price of up to £500,000 gives you a better chance of getting a foot on the property ladder. It also allows you to consider a higher purchase price without being penalised for stamp duty.

As a landlord or prospective buy-to-let investor, these temporary rates encourage you to purchase more than one property thanks to the potential savings. Alternatively, these savings open up the opportunity for you to buy a property that can be developed and then sold for profit.

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