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 gruelling, 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 2016, new rules came in for people purchasing second or additional homes.
So what do these new Stamp Duty rates mean for existing or budding buy-to-let landlords? (If you’re interested in what they mean in general, we’ve written the most comprehensive guide you’ll find to Stamp Duty in England & Wales here).
Stamp Duty on second homes/additional properties
Whilst some first time buyers will undoubtedly benefit from the new rules, the same cannot be said for those looking to buy additional properties. If you are buying an additional property with the intention of letting it out, or have a dream of owning a Robbie Fowler-style portfolio of rental properties, then you’ll have to pay a higher rate tax on each property you buy.
Additional properties over £40,000 have an extra 3% tax surcharge whacked on, and this keeps going up:
|
Stamp Duty liability |
Property value |
Stamp Duty rate |
| Exempt | Up to £40,000 | 0% |
| First slice | From £40,000.01-£125,000 | 3% |
| Second slice | From £125,000.01-£250,000 | 5% |
| Third slice | From £250,000.01-£925,000 | 8% |
| Fourth slice | From £925,000.01-£1,500,000 | 13% |
| Fifth slice | Over £1,500,000.01 | 15% |
If you’re thinking there must be a loophole to exploit, the net has been cast widely, so all of the following situations would be caught by the higher rate tax:
- You already own a share in a property that is worth more than £40k and want to buy another property
- You already own a property abroad and want to buy a place in the UK (and this applies equally to UK expats)
- One of you in a married couple or civil partnership already owns a property and you want to buy a second home together
- One of joint purchasers already owns a property and you want to purchase another property jointly
This, combined with the lowest rental yields since 2001 (5%), and the abolition of the Wear and Tear Allowance for furnished properties, is making buy-to-let a far less attractive nest egg for amateur landlords.
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 three 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.