Changes to Stamp Duty Land Tax
10th January, 2015
Major changes to Stamp Duty were announced by the Chancellor last month. We look at the effects on home buyers.
The Chancellor of the Exchequer announced substantial changes to the calculation of Stamp Duty Land Tax (SDLT) in his Autumn Statement on 3rd December 2014.
As from 4th December 2014 a new system of SDLT now applies to residential property which introduces payments on a graduated scale, similar to that seen with payments of Income Tax, rather than on a flat scale where SDLT was payable at a single rate on the full purchase price of the property.
The previous system resulted in significant increases in SDLT when the purchase price exceeded a certain threshold. For example, the purchase of a house for £250,000 would have incurred SDLT of 1 percent, or £2,500, whereas a purchase of £251,000 would have incurred SDLT of 3 percent, or £7,350.
This method of calculation was potentially restrictive for sellers trying to achieve the best price for their properties because purchasers would have the SDLT thresholds in mind when negotiating the price and would understandably try and negotiate below the nearest threshold.
Under the new system there are still SDLT bands but a purchaser will only pay the applicable rate of SDLT on the portion of the purchase price that lies within any particular band. These bands and new rates of SDLT are as follows:
- Up to £125,000 – no SDLT
- 2 percent between £125,001 and £250,000
- 5 percent between £250,001 and £925,000
- 10 percent between £925,001 and £1,500,000
- 12 percent on anything higher
Whilst the rates applicable to each band have gone up, because the method of calculation has changed this shouldn’t cause alarm.
For example, on a property where the purchase price is £560,000, no SDLT would be paid on the first £125,000, 2 percent would be paid on that portion of the purchase price between £125,001 and £250,000 and 5 percent on the remainder of the price between £250,001 and £560,000.
The SDLT payable before the changes would have been £22,400 but under the new system the SDLT payable will be £18,000, a saving of £4,400.
Where Contracts for the purchase of a property were exchanged on or before 3rd December 2014 and the purchase is completed on or after 4th December 2014, a purchaser can choose whether to pay the SDLT under the old or new system. HMRC has an online calculator on its website that provides a calculation of the SDLT payable under each system in order for a comparison to be made.
Generally speaking, purchasers who pay less than £937,500 for a residential property will pay the same or less in SDLT under the new system and in his Autumn Statement the Chancellor said that 98% of people who pay SDLT will be better or no worse off under the new system.
Hopefully this will mean that there will be more room for the negotiation of the purchase price and sellers will be able to negotiate a sales price that better reflects the true value of their properties without the amount of SDLT being too restrictive for purchasers.
No changes have been made to how SDLT is calculated on purchases of non-residential property or on the rent payable when a new lease is granted. SDLT also remains payable at 15% for purchases by companies of residential properties over £500,000 with some exceptions.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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