You may be busy saving away for that first deposit on a house, or looking to upsize your current property, but have you thought about budgeting for stamp duty? Do you know what it is and how it works?
Don’t worry if you’re not sure. We’re here to break it all down and give you some top tips for budgeting it into your house buying costs.
What is stamp duty?
Stamp duty is the tax you are required to pay when you buy property or land over a certain value in England or Northern Ireland. It doesn’t matter whether you are buying a freehold, a leasehold or a property through a shared ownership scheme. Nor does it matter if you are buying outright or with a mortgage. You are still required to pay it.
How much it will be depends on the value of the property you are buying. It is calculated as a percentage of the property price. And there are price thresholds that dictate how much you will have to pay.
But don’t worry. Your solicitor will typically deal with your stamp duty return, which needs to be filed within 14 days of purchasing your property.
What’s different in 2020?
You may have noticed a lot more chatter about stamp duty in 2020. And that is because the government has made temporary changes this year in order to stimulate the housing market in response to the impact of the pandemic.
The biggest change has been that if you purchase a property worth up to £500,000, you won’t have to pay stamp duty. That is a saving of thousands of pounds for prospective homebuyers.
Want to know more? Check out our comprehensive guide to stamp duty changes in 2020.
How long will the stamp duty holiday last?
Currently, the stamp duty holiday for properties valued under the £500,000 threshold will stay in place until March 2021.
But you may not be ready to move in the next six months. Or you might be concerned that the temporary tax holiday will inflate already high housing prices. If this is the case, but you are looking to move at some point in the future, have you budgeted for stamp duty when it returns to its previous rates?
From 1 April 2021, thresholds will return to £125,000 for residential properties and £150,000 for non-residential land and properties.
If you purchase a property that costs you over £125,000, you will be required to pay 2% in stamp duty. This then increases on a sliding scale, and you’d be expected to pay 5% of a property costing over £250,000.
There is good news if you’re a first-time buyer though. From 1st April 2021 the government will offer a discount to you, or anyone else you are buying with, as long as one of you is a first-time buyer. This means you’ll pay no stamp duty if the purchase price is £500,000 or less.
How can I afford to pay stamp duty?
If you are already a homeowner looking to move after 31 March 2021, then consider starting a savings pot to cover the stamp duty charges.
As this can run into several thousands of pounds, having a dedicated savings pot for this cost will help you reach your goal. It will also stop you being tempted into spending the money elsewhere.
Meanwhile, taking a look at your income and outgoings is always a good exercise to do – especially before applying for a mortgage.
Stamp duty is one of those charges that you can’t really borrow money for. If you are purchasing a property using a mortgage, lenders will look at your level of borrowing to assess affordability.
If you have had to borrow to cover potential stamp duty costs, this will most likely work against you. And you could have your mortgage application refused.
Therefore, try to get that savings pot built up. Then, when lenders ask if you can afford this property, you can confidently say yes.
If you’re looking for more ways to make your money work for you, why not sign up for MyWalletHero’s email newsletter? You’ll receive our team’s top money-saving tips, lifestyle hacks and handy personal finance ‘must-knows’ – delivered straight to your inbox…
Just enter your email address below to sign up now:
Some offers on MyWalletHero are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.