Stamp Duty

Stamp duty is a very old tax. It was first introduced in the UK in 1694 but its roots can be traced back to the Roman Empire in the sixth century. Not that long ago no one was overly bothered by it. It was a relatively obscure tax, levied on the purchase of certain assets, most notably property and shares (note that you don't pay stamp duty when you sell an asset - you just get clobbered with Capital Gains Tax instead).

In 1997, the Chancellor discovered its potential, hiking the rates at which it was charged on property. When Gordon Brown first entered Number 11 Downing Street, stamp duty raked in £2.5b a year. Currently, it gives him almost £9b, which is 70% more than he gets from capital gains tax and inheritance tax combined!

Property

You pay stamp duty land tax when you buy residential property such as a house or flat. Its payment should be handled by your solicitor, so you don't need to make any special arrangements to pay it. The rates at which you are charged are:

• Up to and including £125,000 - 0%
• Over £125,000 and up to £250,000 -1%
• Over £250,000 and up to £500,000 - 3%
• Over £500,000 - 4%

The lower limit used to be £60,000 -- it remained at from level from 1993 until 2005. Higher rates for £250,000 and above were first introduced in 1997.

There is an additional exemption for certain areas which have been classified as disadvantaged. In these places you are not liable to stamp duty on residential property up to £150,000.

If you're part of an unmarried couple that has jointly bought a property, there's one nasty little fact you should be aware of. If you were to split up and one of you buys the other person's share of the property stamp duty could be payable. In such cases, the consideration for stamp duty purposes is defined as any cash you pay over plus the total of any additional mortgage you take on. For example, if you were to pay £100,000 and take on the remaining half of a £80,000 mortgage then the stamp duty payable would be £1,400 (being 1% of the total of £100,000 plus half of £80,000).

Unlike other taxes, there is no smooth progression between the bands with stamp duty on property. So if your house costs £250,000, you'll pay 1% on the whole amount, which comes to £2,500. However, if it costs £251,000 you'll pay 3% on the whole amount, a whopping £7,530. This daft policy is the reason you'll rarely see properties priced just over £250,000 or £500,000. And to add insult to injury, the stamp duty is rounded up to the next multiple of £5.

Stamp duty land tax is also due on non-residential property. The rates are the same with the exception of the 0% band. This extends to £150,000 for non-disadvantaged areas and to any amount for non-residential property in disadvantaged areas.

Shares

Stamp duty on shares and unit trusts is less painful, being charged at 0.5%. However, it can be a significant cost for frequent traders. Many City-based organisations have called for it to be abolished, to allow the London stock market to become more competitive against the major markets in the US and Europe. However, at least the rate at which it is charged is going in the right direction. Prior to 1984, stamp duty on shares was levied at 2%.

Again, the amount payable is rounded up to the next multiple of £5. It is not rounded up however if you buy shares without receiving a physical share certificate, via a nominee account with an online broker for example. Strictly speaking, paperless transactions (which form the vast majority of transactions these days) are governed by a separate tax, called Stamp Duty Reserve Tax.

Your broker will automatically add it to the cost of any share purchase and pay the taxman on your behalf. Note that you don't have to pay stamp duty when you buy shares in a market outside the UK and you don't pay it when you buy gilts or corporate bonds either.