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First-time buyers and stamp duty

By Martin Fagan - news@consumerchoices.co.uk

Do first-time buyers have to pay the dreaded stamp duty? Or is it waived on properties worth up to £250,000? Well, yes - and no...

Change of name

The first thing to clarify is that stamp duty isn’t stamp duty anymore, at least where property is concerned. Since the 2003 Finance Act was passed, to differentiate it from the stamp duty levied on share transactions, stamp duty on property is now referred to as "stamp duty land tax" (SDLT).

The bewilderment for first-time buyers about SDLT is how it applies to them. The confusion stems from how various Chancellors of the Exchequer have monkeyed with SDLT in the last few Budgets.

In September 2008, the UK government announced the threshold for paying SDLT would be raised from £125,000 to £175,000 for one year. In the April 2009 Budget, the then Chancellor Alistair Darling extended this "stamp duty holiday" until the end of 2009. In the June 2010 budget, the new Chancellor George Osborne ended stamp duty on homes costing under £250,000 for first-time buyers, while introducing a new 5% rate for properties costing over £1million.

Confusion for first-time buyers

But this has caused confusion among first-time buyers who assume that any property they buy at or below £250,000 is free of SDLT. Well, yes it is and no it isn’t.

Yes, if you’re a first-time buyer - somebody who has never before owned a property - and you buy your first property for £250,000 or under you won’t pay SDLT. This will be the case until 24 March 2012 when the government will review it.

The problem arises when you’ve previously owned property - even if you’ve sold it. Or, even if your partner or spouse or anyone else you’re buying with has owned property before, again even if they no longer own it now.

The small print of the 2010 Budget defines a first-time buyer as an individual who has not previously purchased an interest in a property or its equivalent anywhere in the world [our italics].

In these circumstances, you’re no longer considered as a first-time buyer and you pay SDLT of 1% on properties over the current £125,000 threshold and up to £250,000. Over £250,000 and up to £500,000 you’ll pay 3%; over £500,000 and below £1million you’ll pay 4% and over £1 million you’ll pay 5%.

As the daughters of Formula One supremo Bernie Ecclestone proved when their dad paid out a total of £110 million for a pair of London pads in which to house them, some first-time buyers will pay far more in SDLT than others pay for their actual property.

The pain of paying SDLT

However, for mere mortals, paying SDLT can be painful. This is because SDLT isn’t a “tiered” tax like income tax (PAYE) where a different tax rate is levied as income breaks through various tax bands but is payable only on the portion of the salary above the various bands. Also, you have a tax-free allowance under which you pay no tax at all.

No, to screw more money out of the electorate, SDLT is a “slab” tax where £1 over the threshold means you pay the higher rate of tax on the whole purchase price and not on the bit that breaks through the threshold.

For example, a house priced at £250,000 would attract an SDLT of 1% (£2,500), but a house priced at £250,001 would be liable to SDLT of 3% on the entire purchase price (£7,500). The result is that SDLT has a distorting effect on the housing market, because a house is very difficult to sell at prices just above each threshold, for example, £255,000.

Another aspect of SDLT is you can’t borrow it either as part of the mortgage or as a more conventional bank loan. Lenders only lend on tangible assets and prefer collateral such as land and property.

Advancing you money to pay an inconvenient tax is not something they’re prepared to do. So, as well as scraping the money together for a deposit, you’ll have to scrape the money together to pay the SDLT bill.

And finally...

But if you (or your partner) have never before owned property of any type (anywhere in the world), the good news is that, with the threshold set at £250,000, the Council of Mortgage Lenders (CML) estimates 92% of all first-time buyers avoid paying stamp duty.