What is Stamp Duty Land Tax and how does it work?
Stamp duty – or to give it its official title Stamp Duty Land Tax – is a tax on the purchase of land and property. It is calculated as a percentage of the ‘chargeable consideration’ – anything of economic value paid by the purchaser – above various thresholds. The table below (taken from the HMRC site) outlines the thresholds for 2013-14:-
|Purchase price/lease premium or transfer value||SDLT rate|
|Up to £125,000||Zero|
|Over £125,000 to £250,000||1%|
|Over £250,000 to £500,000||3%|
|Over £500,000 to £1 million||4%|
|Over £1 million to £2 million||5%|
|Over £2 million from 22 March 2012||7%|
|Over £2 million (purchased by certain persons including corporate bodies) from 21 March 2012||15%|
In contrast to income tax, stamp duty is applied to the whole purchase price. If, for example, your income is £50,000, the first £32,010 would be taxed at 20% and only the remaining £17,990 would be taxed at a higher rate (40%).
However, remember the above example applies to income tax. The bad news is this is not how stamp duty works. For example, if you buy a house for £125,000 there is no stamp duty to pay, whereas if you buy a house for £125,001 you will have to pay 1% stamp duty on the entire value of the house.
So you’ll have to add £1250.01 to the cost of that house that you forked out £125,001 for. Sadly you won’t just be charged an additional 1p (1% of the value of the house that is over the threshold).
What is the Chargeable Consideration?
The chargeable consideration is the total value of anything provided in exchange for the property or land. This might just be cash but it could include goods, work, services or release from / transfer of a debt like a mortgage liability.
What about when no money changes hands?
I’m afraid you can’t hide from Stamp Duty Land Tax that easily. Here are some other common situations where you may be liable:
- Getting married, entering into a civil partnership or setting up a home together
Let’s say John marries Jane and transfers half his property to her. The property is valued at £200,000, with equity of £120,000 and a mortgage of £80,000. The consideration for stamp duty purposes is therefore £40,000 from the mortgage (essentially, you are ‘buying’ the debt). Since it is below the threshold there will be no stamp duty to pay, but they will have to inform HMRC about the transaction.
- Divorce, separation or the end of a civil partnership
If an interest in a property is transferred as part of a court order in the event of the above there is no stamp duty to pay and no need to inform HMRC – even if it is above the threshold.
- Received as a gift or from a will
There will generally be no stamp duty payable, unless there is a mortgage liability transferred as part of a gift (not from a will). In these instances it may be payable on the mortgage value if it is above the threshold.
- Transfer to or from a company
If a property is transferred to a company by a ‘connected person’ – eg relatives of the directors involved – there is stamp duty to pay on the market value of the property. The same would apply if the property is paid for by the issuing of shares from a connected company.
What do I need to do?
In most cases – for example when you buy a property – the solicitor you are working with will take care of the administration required, such as completing the return, informing HMRC, letting you know how much to pay and when you have to pay by.
In some specific or unusual cases, such as those not listed above, you may want to consult an accountant, tax advisor or solicitor to advise you.