Many aspects of owning property comes with charges and taxes that need to be paid. Whether you’re buying a home for yourself or a property to be let out to tenants, you’ll need to know the applicable tax when buying a house.
How does tax differ from one situation to another? How does the tax on buying a house in the UK contrast to the tax on selling a house? Let’s take a closer look.
What taxes do you pay when you buy a house in the UK?
Stamp Duty Land Tax
When property (or land) valued over a certain threshold is purchased in England or Northern Ireland, you must pay Stamp Duty Land Tax (SDLT), commonly referred to as just stamp duty. Scotland has its own version of this called Land and Buildings Transaction Tax.
Stamp duty is charged by the Treasury, and its name derives from the historical practice of physically stamping documents that proved the payment of the duty.
Stamp Duty Thresholds
SDLT has differing thresholds at which it applies depending on the nature of the property in question. For residential properties, the threshold in 2022 is £125,000. For non-residential properties and land, the threshold is £150,000.
Beyond this, the rate of applicable tax for residential properties is divided into bands:
- Values from £0 to £125,000 pay no stamp duty.
- Values from £125,001 to £250,000 pay a rate of 2% of the purchase price.
- Values from £250,001 to £925,000 pay a 5% rate.
- Values from £925,001 to £1,500,000 pay a 10% rate.
- Values over £1,500,000 pay a 12% rate.
If the property you are purchasing is in addition to property you already own, then an extra 3% is added to your rate. This applies for property owned anywhere in the world, not just property in the UK. Non-UK residents also face a further 2% added onto the rates, making the tax for a foreign investor with an existing portfolio overall 5% more expensive on the purchase price.
Note that these rates don’t apply in the same way for first-time buyers as of July 2021. If all buyers involved are first-time buyers on a property valued at £500,000 or below, stamp duty doesn’t apply.
Additionally, you are still eligible for stamp duty even if you are acquiring a property (not for the first time) through means other than money, such as through shares or swapping another property.
If you have paid the additional 3% rate for an additional property purchase, it may be possible to claim that portion back if your original home is sold or passed on (e.g. to your children) within three years of the purchase. For properties sold on or after 29th October 2018, it must be claimed within twelve months of either the transfer of the previous main residence, or the date that the stamp duty return was filed for the new property – whichever date comes later.
For residential properties, once the purchase has been completed, the only tax that remains to be paid is council tax. Council tax is calculated differently in each territory of the UK, and in England is derived from what the value of your property would have been on 1st April 1991.
Paying Stamp Duty
Stamp duty cannot be paid in instalments, and in most cases must be paid as an upfront lump sum within 14 days of the date of completed purchase. It can be paid through online banking, by debit card, or via cheque, but HMRC banned the use of credit cards to pay stamp duty as of 2018.
Some people opt to pay their stamp duty off through their mortgage, for instance if they don’t have the necessary savings to pay it up front. It’s commonly advised not to do this unless absolutely necessary, as it ultimately means an increase to the debt you must pay off.
By including stamp duty with your mortgage, you’ll also end up paying interest on the added amount for the full term. This could end up costing you more than the stamp duty itself by the time your mortgage is winding down.
For the process of actually buying a home, SDLT is the only tax that directly applies to the purchase (assuming you’re not a first-time buyer).
Whereas stamp duty is a fixed amount you pay upon a house purchase, council tax is ongoing and is never truly paid off. You only have to start paying Council Tax from the date of Completion, not from the date of Exchange. The seller is still responsible for paying Council Tax until the date of Completion.
Paying the council tax bill is usually the responsibility of the person living in the property. This would be either the owner-occupiers or the renters in privately rented or council accommodation. Some people are exempt from paying council tax, including full-time students and some live-in carers.
First time home buyers may find it beneficial to understand which council tax band their property falls into when buying a house, and whether their property is in the correct band. In some cases, you can pay less council tax by securing a change in band.
Council Tax Bands
In England, there are eight council tax bands lettered A – H, representing the lowest to highest valuation ranges:
Band A = up to £40,000
Band B = £40,000 to £52,000
Band C = £52,000 to £68,000
Band D = £68,000 to £88,000
Band E = £88,000 to £120,000
Band F = £120,000 to £160,000
Band G = £160,000 to £320,000
Band H = Greater than £320,000
The amount charged for each respective band is set by the property’s local authority, so two houses in the same lettered band will not necessarily pay the same amount. Under the English council tax system, the amount charged for a property in band A will always be a third of that charged on a band H property.
Who pays stamp duty? The buyer or seller?
Stamp duty is purely a tax when buying a house, and it isn’t a concern of the seller.
Capital Gains Tax is a possible tax on selling a house if the value of the property has increased beyond £12,300 and is charged at either 18% or 28% depending on the seller’s income and other financial factors.
Buying a house with Mistoria Estate Agents Cheadle
We understand the ins and outs of paying tax when buying your home. Let us take the stress out of the mounting costs and taxes involved with conveyancing by providing clear, experienced advice to guide you every step of the way.