As an investor, you will have to carefully consider the stamp duty when purchasing property in England and Wales. For example, if you buy a second home worth £250,000, you should be prepared to pay an average of £75,000 in extra stamp duty land tax.
What is Stamp Duty Land Tax?
What are the rates payable for Stamp Duty?
How is Stamp Duty calculated?
What is the First-Time buyer relief?
When is the Stamp Duty Land Tax not payable?
How do you pay Stamp Duty Land taxes?
What happens when you buy commercial land?
Can you claim Stamp Duty Land tax as deductible on tax returns?
Do you have to pay Stamp Duty when you invest as Limited Company?
Stamp Duty Questions for Property Investors
As an investor, you will have to carefully consider the stamp duty when purchasing property in England and Wales. This tax is not negligible. For example, if you buy a second home worth £250,000, you should be prepared to pay an average of £75,000 in extra stamp duty land tax. This 3% will be in addition to the regular stamp duty fees. You should note that investing in land is still one of the best financial decisions you will ever make, even with this extra tax. This guide will answer all your questions regarding the stamp duty on investment property.
What Is Stamp Duty Land Tax?
Stamp duty is a land tax imposed on the purchase of land with a value that is beyond a certain threshold. The tax is imposed by the UK government and is payable to Her Majesty’s Revenue and Customs. This tax has to be paid within 30 days of completing the purchase. If you fail to pay in this period, you may be fined, and this will only increase the amount of money owed.
What Are the Rates Payable for Stamp Duty for Property Developers?
The rates you pay will be determined by the purpose of the property. You could be purchasing the property for residential purposes, non-residential purposes, or even mixed functions. The land will qualify as residential property if you intend to live on it. On the other hand, if you want to use it to set up shops or farms, you will have to pay the rates of non-residential property. An example of a mixed purpose house is one which has residential flats and a supermarket on the ground floor.
The stamp duty rates will increase as you cross more value thresholds. The highest rate you will have to pay for the residential property is 12%, and this is applicable to property worth more than £1.5 million. Non-residential land will attract a maximum rate of 5% for property worth more than £250,000.
It is worth noting that property worth less than £125,000 will not be charged any stamp duty land rates. There is also a second home stamp duty exemption that applies if you are purchasing property worth less than £40,000. If your second home is worth more than £40,000, you will have to pay an extra 3% on it. The stamp duty land rates apply to both freehold and leasehold property.
How is the Stamp Duty Rate Calculated?
The actual amount of money you pay in stamp duty land rates will be calculated based on the total value of your property. If your residential property is worth £1.5 million, you will have to pay the highest rates. The amount you pay is calculated as follows:
0% on the first £125,000= £0
2% on the next £125,000= £2,500
5% on the next £675,000= £33,750
10% on the final £575,000= £57,000
That brings the total stamp duty land tax to £93,250.
For non-residential property, the rates will be calculated as follows:
£0 to £150,000- 0%
£150,001 to £250,000- 2%
Over £250,000- 5%
The non-residential rates also apply to property that is both commercial and residential.
A buy to lease property will have additional taxes imposed on the value of the annual rent. The stamp duty on the rent will be calculated as follows:
£0 to £150,000- 0%
£150,001 to £5,000,000- 1%
Anything over £5,000,000- 2%
If you are trying to sell your other house, the 3% second home surcharge will still apply. This additional charge can be claimed back if you sell your other property within 3 years.
What Is the First-Time Buyer Relief?
In the UK, first-time property owners are given a stamp duty relief. They do not have to pay any stamp duty land rates for property worth less than £300,000. Such investors will save up to £5,000 in taxes. If a first-time buyer purchases property worth £500,000, they will still not have to pay any taxes on the first £300,000.
However, if they buy property worth more than £500,000, their stamp duty rates will be calculated normally as they will no longer be considered first-time buyers. Also, this relief is only meant for people who intend to live on the property they purchase. If you are buying to let, you will not be entitled to the first-time buyer relief.
Generally, a first-time buyer is any person who has never owned property in the UK or overseas. The stamp duty relief can be applied to couples who are sharing costs on their property. In such cases, both parties must qualify to be first-time buyers. If one of the parties does not qualify, the other one can purchase the property and enjoy the tax relief. However, putting only one name on the mortgage application can limit the amount of money you can get from a lender. Also, in case you split, there is a possibility that the property will be left to the person who legally owns it.
The shared-ownership property relief was backdated to 22nd November 2017, and any qualifying investors should claim refunds.
When Is the Stamp Duty Land Tax Not Payable?
The stamp duty is not payable for property worth less than £125,000. Also, if you gift your property to someone in a will or just as a regular gift, no stamp duty fees will be payable. In case of a divorce or separation, you will also be able to leave a portion of your land to your spouse without having to pay any extra fees. These cases should not be confused with actual property exchanges. If you exchange your land with a friend, you will both have to pay stamp duty rates on the market values of the property.
How Do You Pay Stamp Duty Land Taxes?
You will not normally have to pay the stamp duty land taxes yourself. Your solicitor will file the stamp duty return with Her Majesty’s Revenue Commission (HMRC) on your behalf, and they will then make the payments using your funds.
What Happens When You Buy Commercial Land with the Intention of Developing it Into Residential Property?
The stamp duty land tax is calculated based on the current state of the land. The government is not concerned with the past uses or the future developments of the property. Your land will qualify for the residential stamp duty rates if it meets these requirements:
It is a building with less than 6 dwellings.
The land forms a part of grounds that are suitable for the dwelling of less than 6 people.
The property will be considered commercial if it has six or more flats. If the building has a shop or supermarket, it will be considered a non-residential property. Also, if the land has a farm or farms, you will have to pay the stamp duty for commercial property.
Sometimes, it can be hard to determine whether your land qualifies as residential or non-residential property. Whenever you are in doubt, you should consider getting professional advice.
Can You Claim Stamp Duty Land Tax as a Deductible on Your Tax Returns?
It is not possible to claim stamp duty as a deductible on your tax returns. The main expenses that can be claimed as deductibles are repairs, accountancy fees, insurance bills, and maintenance costs. There are other expenses that you can claim as deductibles, but these do not include stamp duties.
That being said, you will be able to claim a deductible on your capital tax gains when you eventually sell the house. It is important to keep a record of the amount of money you paid in stamp duty fees as this will help you receive the returns.
Do You Have to Pay the Stamp Duty When You Invest as a Limited Company?
There are many benefits of investing in property as a limited company. However, avoiding the stamp duty is not one of these benefits. If you choose to invest in this way, you will still have to pay stamp duties as a regular investor. You should still consider purchasing property through a limited company, especially if you are at a higher tax band. If you go through a company, you will only have to pay the corporate tax of 20%. Of course, you can also choose to put the property in the name of the lower-earning spouse.
The stamp duty on investment property can significantly increase the amount of money you have to pay for the property. The rate is determined by the purpose of the property and its market value. Residential property is defined as any piece of land that is meant to accommodate less than 6 residents. On the other hand, non-residential property is defined as any property that contains shops, commercial spaces, or farms. The land will attract a 3% stamp duty surcharge if you already have another property. It is possible to get a refund of this surcharge if you sell your first property within 3 years of purchasing the new one. If you have never owned property in the UK or overseas, you will be able to enjoy the first-time buyer relief. With this relief, your purchase of property worth less than £300,000 will not attract any stamp duty taxes. However, if you buy a house worth more than £500,000, you will have to pay the normal rates.