You pay stamp duty on UK property when you buy a home that costs more than £125,000.
There is no stamp duty payable if you’re the seller of the property.
Stamp duty is a transaction tax (the long name is Stamp Duty Land Tax), which you need to take into account when working out your budget for moving or buying a home [1] for the first time.
Buying a property in Scotland? From April 2015 stamp duty is replaced by a levy called the Land and Buildings Transaction Tax [2].
Stamp duty on UK property rates
The stamp duty rate paid by home buyers varies depending on the purchase price of the property.
There are five stamp duty rate bands. You pay stamp duty at the indicated rate on the portion of the price lying within each band.
The stamp duty rate bands are as follows:
| Purchase price band | Stamp duty rate |
| £0 – £125,000 | 0% |
| £125,001 – £250,000 | 2% |
| £250,001 – £925,000 | 5% |
| £925,001 – £1.5 million | 10% |
| Over £1.5 million | 12% |
Source: GOV.UK [3]
For instance, if you were buying a home for £400,000 you’d pay:
No stamp duty on the first £125,000 of the total £400,000.
A 2% stamp duty rate on the next £125,000 up to £250,000.
The 5% rate on the final £150,000 of your £400,0o0 purchase.
This works out as:
£0 (up to £125,000) + £2,500 (2% of £125,000) + £7,500 (on £150,000)
= £10,000 in total stamp duty.
Incredible! An improvement to the tax system
Under the old stamp duty system [4], stamp duty was payable at the highest applicable rate on the total purchase price of a property.
That was a really stupid way of doing things.
Stamp duty inevitably adds friction to the home buying process by making it much more expensive to move house, and it doesn’t do much to restrain prices.
But the old system also distorted asking prices.
For instance, there was a 3% band that kicked in if you bought a property worth more than £250,000. Stamp duty on a £250,000 property was £2,500, but were you to pay just £1 more you’d face a stamp duty tax bill of £7,500.
You’d pay an extra £5,000 in stamp duty because of that measly £1!
In reality few people would do that, so house prices were distorted around the different bands by sellers trying to take into account these warping effects when setting their asking price.
Similar one-bedroom Zone 3 London flats stayed priced at £250,000 for many months even in the rising market, for instance, before leaping up to £275,000 as a group. Very few people ever paid £255,000 in the meantime.
Buyers also resorted to ruses to reduce stamp duty [5].
The new stamp duty rates introduced in December 2014 did away with the distortions of the old ‘slab’ stamp duty system, because the higher rates are only chargeable on the portion of the property price that falls within each rate band. (It’s similar to what happens with your salary and income taxes [6]).
In addition, the total stamp duty you’ll pay on a particular property price is lower in the vast majority of cases under the new system.
Chancellor George Osborne says you’d have to spend more than £937,000 to see your bill go up under the new system.
The £10,000 payable in my example above would have been a £12,000 stamp duty bill before – that’s a saving of £2,000 under the new stamp duty rules.
But put the Aldi prosecco back on ice – I’d expect any such savings in the cost of buying a home to be quickly reflected in house prices moving higher.
The main benefit of the 2014 overhaul of stamp duty will therefore be the removal of those cliff-edge distortions, which may make the market a tad more liquid [7], too.
Stamp duty on UK property calculator:
- You can work out your stamp duty bill under the new system using this handy HMRC stamp duty calculator [8].
That calculator also shows you what was payable under the old rules, which may be handy to know if you’re in the midst of a move.