What do the new stamp duty rates mean for your property purchase?

This is a guest post written by Caroline Hughes. Caroline is co-founder of Lifetise, which creates interactive tools to help make big life decisions easier and more affordable. They’ve recently launched HomeFinder which shows people where they can afford to buy.

 

Stamp duty, much like inheritance tax, has a bad name. For first-time buyers struggling to save for a deposit, it can seem like the painful last leg of a grueling, long-distance race. For property investors, it is that extra outlay on top of the purchase price that can affect the return on investment.

It is also a tiered tax, so instead of one flat rate applying to every purchase, how much you pay depends on the value of the property, and different rates of tax apply to different ‘layers’ of the property price.

Like any tax, stamp duty (or stamp duty land tax, to give it its full name) is subject to change with government policy. The government has made two rounds of changes to stamp duty on purchases in England and Wales in the past 12 months. In the 2017 Autumn Budget, the Chancellor revealed that stamp duty rates would be changing for first-time buyers. Prior to that, in April 2017, new rules came in for people purchasing second or additional homes.

So what do these new stamp duty rates mean for you? Well, that rather depends if you are a first-time buyer, or looking to add additional properties to your portfolio.

New rates for first-time buyers, a boon, or a damp squib?

The biggest challenge for most first-time buyers is being able to save enough for a deposit and stamp duty, whilst paying rent. Successive governments have looked at introducing ways to make this easier for first-time buyers: from help-to-buy ISAs and equity loans to stamp duty cuts or freezes.

The new stamp duty rates apply to any first-time buyers spending up to £500,000 on a property and work like this:

• If you spend less than £300,000 on your property, you’ll pay ZERO stamp duty.
• If you spend between £300,000 and £500,000, you’ll only pay 5% on the amount over £300k.

Under the old regime, there was no special treatment for first-time buyers, so they were subject to the same rates as everybody else:

• 0% on the first £125,000 of the property price
• 2% on the next £125,000
• 5% on the next £625,000

For a full walk-through (with illustrations) on how this compares to the previous regime, this article explains everything.

The most that you will save as a first-time buyer is £5,000, but for some, this could make the difference between buying now or waiting another year.

Unfortunately, if you are a first-time buyer spending more than £500,000 on a property, you do not get any discount. You get thrown back into the pool with all of those second and third-time buyers and have to pay standard rates.

What that means for purchasers looking at spending around the half-a-million mark, is that you need to ensure that you come under, not over, the threshold. If you spend just £5,000 over the £500k threshold, you will pay the same again in tax!

A tale of two cities

The Chancellor said that the stamp duty cut was expected to benefit 95% of all first-time buyers, while 80% were expected to pay nothing at all. However, the £500,000 threshold inevitably means is that there are going to be winners and losers, depending on where in the country you want to buy.

Under the existing regime, you do not have to pay stamp duty if the property you are buying costs less than £125,000. So in areas such as the North-East of England and parts of Wales, where the average price of a starter home is under £125,000, the rate changes will have very little impact.

Similarly, in London (where an estimated fewer than 5% of properties cost less than £500k), and much of the South-East of England, the number of people that these cuts will help onto the property ladder is limited.

The 3% squeeze on additional homes

Whilst some first-time buyers will undoubtedly benefit from the new rules, the same cannot be said for those looking to buy additional properties.

Stamp duty rates on second homes over £40,000 have an extra 3% tax surcharge added. Worth bearing in mind if you’re thinking of buying a holiday home, becoming a landlord or taking out a joint mortgage with your kids to help them get on the property ladder. And the rate increases with the value of the property:

Additional Property price		Stamp duty rate
Exempt	up to £40,000	0%
First slice:	From £40,000.01 to £125,000	3%
Second slice:	from £125,000.01 to £250,000	5%
Third slice:	from £250,000.01 to £925,000	8%
Fourth slice:	from £925,000.01 to £1,500,000	13%
Fifth slice:	over £1,500,000.01	15%

And the net has been cast wide for this higher rate tax:

• If you already own a share in a property that is worth more than £40k and want to buy another property
• If you already own a property abroad and want to buy a place in the UK (and this applies equally to UK expats)
• If one of you in a married couple or civil partnership already owns a property and you want to buy a second home together
• If one of joint purchasers already owns a property and you want to purchase another property jointly
• If home-owning parents take out a joint mortgage with their children (better to help with the deposit/act as guarantor)

Don’t worry though, this won’t affect anyone who finds their new dream home before they’ve managed to sell their old one. So long as you complete the sale on your old property within 3 years of your purchase of the new property, you can apply for a refund of the higher rate stamp duty.

It will be interesting to see what effects these recent changes will have in 2018.

Hopefully I’ve managed to make a dry subject seem at least a little more palatable! As always with taxation, it’s best to be 100% informed when tackling it head on.

 

Property Moose does not provide any tax advice and encourages you to talk to a specialist.

 

The post What do the new stamp duty rates mean for your property purchase? appeared first on Economoose.