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Calls to scrap stamp duty

Calls to scrap stamp duty

Category: Mortgages

Updated: 23/11/2017
First Published: 25/02/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Two reports released in the last week have shown that average house prices have exceeded the £250,000 mark, meaning the average UK property now sits squarely in the 3% stamp duty bracket. As previously reported by Moneyfacts, this has led many to fear an impending stamp duty crisis, where homebuyers are being forced to spend thousands of pounds on this additional "stealth tax". As such, there have been calls to scrap – or at least amend – current stamp duty rules, with homebuyers, sellers and industry experts alike all agreeing that the current system is neither fair nor sustainable.

What is stamp duty?

Stamp duty is a levy paid by homebuyers when they purchase a property. It's charged as a percentage of the full purchase price, and at one time was a flat rate of 1%. But, times have changed, and these days you can be charged up to 7% – if you're lucky enough to buy a home worth over £2 million – with the system being severely criticised for not raising tax bands in line with house price inflation.

Know your limits

Currently, the tax band limits are as follows:

  • Purchase price up to £125,000 – zero stamp duty paid.
  • Over £125,000 to £250,000 – 1% stamp duty.
  • Over £250,000 to £500,000 – 3%.
  • Over £500,000 to £1 million – 4%.
  • Over £2 million – 7%.

This applies to residential properties only, with there being different rates for corporate bodies and residential or mixed-use properties.

The system is regarded as highly unfair, particularly as average house prices have exceeded the £250,000 bracket – meaning a large proportion of homebuyers could be faced with huge tax bills thanks to the "cliff edge" effect. When the threshold is breached the new rate applies to the full purchase price, not just the amount over the threshold, so even if you spend just a pound above the £250,000 limit you'll be charged 3%.

Effectively, this means that if you buy a home worth £250,000 you'll pay £2,500, but spend £250,001 you'll be charged a whopping £7,500. Incidentally, it's also worth remembering that the tax band applies to the purchase price and not the mortgage amount – if you're concerned about impending affordability, make sure you've got a suitable mortgage deal to help keep additional costs to a minimum.

Is there a way to avoid stamp duty?

The only way to avoid paying excessive stamp duty is, if possible, to only offer amounts under the relevant stamp duty thresholds. Unfortunately it's not such good news for sellers, who might find it difficult to sell their home for the full asking price – particularly if that asking price is only a few thousand pounds above the threshold. There've been anecdotal reports of sellers losing thousands of pounds because buyers weren't willing to breach the threshold, something which could be increasingly common with rising house prices.

Change could be on the cards…

Ideally this won't be such an issue for much longer. The Chancellor is coming under increasing pressure to amend stamp duty rules in March's Budget, with the Government coming under fire for sticking to its system. Critics argue that the tax effects people at every stage in life – even though various policies are encouraging more people to get on (and move up) the ladder, each new purchase could result in the barrier of higher tax. However, there are concerns that fears of a housing bubble will mean the Government will be reluctant to give a further boost to the market, although there are only three weeks to wait for the outcome…

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