For many home buyers 'stamp duty' is the hidden peril and one of the biggest cheques you'll have to write in the process… what is it, and how does it apply to you?
Stamp duty land tax (to give it its full name) is a tax on property transactions. It is calculated as a percentage of the whole of the purchase price paid. There is no charge under £125,000; it is 1% from £125,001 to £250,000; jumps to 3% from £250,001 to £500,000; and is 4% for transactions over £500,000. No charge applies to properties of up to £150,000 if they are in a 'Disadvantaged Area'.
So, why is everyone talking about this now? In what many referred to as a 'bland budget' this year's headline winner was the new two-year stamp duty 'holiday' for first time buyers. This means people who have never owned residential property in the UK, or anywhere in the world, and who intends to occupy the property as their main or only residence. This relief applies if they are buying properties that cost up to £250,000 and may well save them between £1,250 and £2,500. In a period when many are struggling to save up large deposits this has come as welcome news.
The political and financial commentators, however, have been more cynical. Whilst they have broadly welcomed this change the reality is that this new 'holiday' comes after a gap of only 3 months since the last 'holiday' ended on 31 December 2009.
The concept of a 'holiday' may be attractive, particularly with an election to fight, but are such 'special offers' really helpful? When the previous 'holiday' for first time buyers ended in December, the Government also decreased the threshold for paying stamp duty from £175,001 to £125,001. Rather than only supporting first time buyers might it have been simpler, and possibly fairer, to have continued the previous 'holiday', or just permanently increased the threshold for all buyers. As things stand, a limit of £125,001 benefits very few. You could argue that the current arrangement incentivises first time buyers by decentivising all other buyers.
There are other areas for concern for any Government reviewing how stamp duty is charged, however. There has been continued criticism of the way the tax is currently charged, and commentators regularly suggest that a graduated tax (like income tax) would be fairer as well as fiscally neutral. Certainly the current structure can cause price distortions for property marketed close to any of the bands. Importantly, anyone who buys property, even if no tax is paid, completes and submit a return to the Inland Revenue who have powers of enquiry. If a buyer is found to have made a false claim then they will be liable to pay any unpaid tax plus interest and penalties, plus be subject to potential criminal prosecution for fraud.
At this point, all we can do is 'watch this space' and be ready to take advantage of any opportunities that present themselves over what will be an interesting few months for home buyers.
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by Susan Ellis