In 2014 the Government announced a reform of what had been called “one of the worst-designed taxes in Britain” – Stamp Duty. Although the changes mean there are still losers as well as winners, the vast majority of residential property purchases now benefit from lower tax.
The old Stamp Duty system
There was a simple problem in the past. If you bought a house costing £249,999 you paid £2,499.99 in tax. If your house cost £250,001 you paid £7,500.00 in tax. That's £5,000 more for a house that cost just an additional £2.
Stamp Duty was charged at successively higher percentage rates on the entire cost of the property. For this reason it was often criticised as a "slab tax”.
Stamp Duty Rates pre-4 December 2014
House price Stamp Duty Percentage
Up to £125,000 0%
£125,001 to £250,000 1% of entire purchase price
£250,001 to £500,00 3% of entire purchase price
£500,001 to £1,000,000 4% of entire purchase price
£1,000,001 to £2,000,000 5% of entire purchase price
Over £2,000,000 7% of entire purchase price
Another problem was that the tax bands hadn’t changed in years, so as house prices increased lot of ‘average priced’ homes in the market now fell into a much higher tax bracket.
The new Stamp Duty system
Under the rules that came into force on 4 December 2014, buyers only pay the rate of tax that applies to the amount of the purchase price that falls within the particular tax band - like income tax. Thus although the percentage rates appear higher in some cases, the overall charge will mostly be lower.
Stamp Duty Rates post- 4 December 2014
House price Stamp Duty Percentage
Up to £125,000 0%
£125,001 to £250,000 2% on the property value that falls in this band
£250,001 to £925,000 5% on the property value that falls in this band
£925,001 to £1,500,000 10% on the property value that falls in this band
£1,500,001 and over 12% on the property value that falls in this band
For example, under the old system if you bought a house worth £275,000, you would have paid 3% on the entire price or £8,250 of tax. Under the new system, you'd pay nothing on the first £125,000, then 2% on the next £125,000 and 5% on the final £25,000 – or £3,750 of tax. So you'd save £4,500 under the new rules.
In actual fact, only people who buy homes worth more than £937,000 (about 2% of households) will pay more in tax.
You can find a Stamp Duty calculator here.