Posted by Vivo_Team on March 23rd, 2021

The impact of Covid-19 has seen many industries, such as hospitality and leisure, face extremely tough times. With guidance to stay at home and businesses to close, many parts of the economy have shrunk. However, during this period, the property market has been booming, helped in part by the announcement of a stamp duty holiday. We look at why this tax break was introduced, how it can benefit home buyers, and why getting a secure buyer is vital ahead of the holiday beginning to end after June 30th 2021.

Lost your buyer, what you can do

What is the stamp duty holiday?

On the 8th of June 2020, Chancellor Rishi Sunak announced that until the end of March 2021, there would be a freeze on paying stamp duty on property purchases under £500,000. In the budget of March 2021, after much speculation, this policy was then extended until the end of June 2021, tapering until October 2021. For people looking to buy a house, this ‘holiday’ made it easier and more appealing as they would be able to save money on this common cost in the buying process.

Why was the stamp duty holiday created?

The government’s aim is to incentivise people to buy houses to stimulate the property market and in turn, boost the economy during the greatest financial challenge since World War Two.

As a nation of proud homeowners (especially compared to countries like France or Germany), the property market is an important contributor to the economy, and its impact is far wider than just the house buying transaction. There is a butterfly effect when lots of people buy homes, as they will continue to spend money which helps to stimulate economic growth to businesses associated with property. This can range from the hiring of removal firms to help with the moving day to furnishing and decorating their new home (interior design businesses).

If you’re new to property buying, we’ll now look at what this tax is and what purpose it serves.

What is the Stamp Duty Land Tax (SDLT)?

In England and Northern Ireland (the legislation is different in Scotland and Wales), if you buy property or land over a certain price, you must pay Stamp Duty Land Tax, commonly abbreviated to SDLT. It’s applicable whether the property is freehold or leasehold, you’re buying through a shared ownership scheme or Help to Buy, or as an investment (such as a buy-to-let). However, you do not pay stamp duty on inherited properties as you pay inheritance tax instead.

The amount of tax you pay is not fixed, but is instead a percentage of the property’s purchase amount over a set threshold. The larger the purchase, the more tax you’re likely to pay.

You must fill out and send an SDLT return form to HMRC and pay this tax within 14 days of completion. This is something normally done by a solicitor or conveyancer on your behalf. Although nowadays this is mainly done online, the term ‘stamp duty’ refers to the physical stamp that would be placed on the property deeds by the government to approve the purchase.

For this article, we will only focus on stamp duty paid on residential house purchases.

What are the stamp duty bands?

Before the holiday began, the 0% stamp duty threshold (meaning you’d pay nothing) was:

  • £125,000 for residential transactions or
  • £300,000 for first-time buyers that were buying a property up to £500,000

The threshold for paying 0% stamp duty on residential properties changed to £500,000 in June 2020 and will remain until the end of June 2021. The 0% threshold then begins to return to pre-Covid levels from July 2021 onwards:

  • July 2021 – September 2021: £250,000
  • October 2021: £125,000 – back to pre-Covid levels

You only pay tax on the purchase amount over the 0% threshold amount, rather than the transaction amount in full. For example, if you buy a property for £600,000 when the threshold is £500,000, your stamp duty tax would be on the £100,000 over the limit. If you bought the property before the holiday, when the 0% threshold was £125,000, the taxable amount would be £475,000 – a big difference!

However, while the benefits of buying during this temporary freeze are useful, it does put pressure on buyers to ensure the transaction is completed in time.

For example, if you purchased a house for £475,000 in February 2021, you wouldn’t pay any stamp duty. However, say you lost your buyer and your sale got delayed until August 2021, you’d need to pay SDLT as the property was purchased over £250,000 . Using the official Stamp Duty Land Tax Calculator, you would have to pay an estimated £8,750 – a significant amount.

It’s never been more important to have a buyer you trust and can rely on, as missing the deadlines will result in added costs into the thousands of pounds.

What stamp duty does a first-time buyer pay?

For first time buyers (or if you’re buying with someone who is a first-time buyer), the tax rate is slightly different. You only incur this cost if your purchase price is £500,000 or more. This means while other buyers will have to pay stamp duty on purchases over £250,000 from July 2021 onwards, the threshold for first-time buyers will remain in its current place, £500,000, for the foreseeable future.

To benefit from this, you can claim relief which exempts you from this tax and you are also eligible for the discount if you bought your first home before the 8th of July 2020.

 

How much is stamp duty tax?

Stamp duty is a progressive tax rather than a fixed one. This means that there isn’t a flat fee for all transactions. The more expensive the purchase, the more you’ll pay. As well as the purchase amount, other factors include:

  • If you’re a first-time buyer
  • If the property is freehold or leasehold
  • If you’re a non-UK-resident
  • If you have additional residential properties
  • If the property is residential or non-residential

The amount that you go over the threshold impacts how much tax you pay. It is separated into different bands, so the taxable amount increases are you go through the tiers. So, for a £650,000 property, you would pay 5% of the £150,000 post threshold amount = £7,500

In the initial stamp duty holiday, the bands were like this:

Lease premium
SDLT Rate
<£500,000 0%
Between £500,000 - £925,000 (£425k after) 5%
Between £925,000 - £1,500,000 (£575k after) 10%
Remaining amount (over £1,500,000) 12%

If you bought a property for £1,000,000, you would pay different tax amounts for different parts of the threshold:

Amount
Taxable Amount

% Rate

SDLT amount
£500,000 N/A 0% £0
£500,000 - £925,000 £425,000 5% £21,250
£925,000 - £1,000,000 £75,000 10% £7,500
Total £28,750

I want to sell in time, what can I do?

The impact of this policy is that it has created a host of keen buyers. The difficulty here is that these restrictions will gradually tighten and from October 2021, go back to pre-pandemic levels, so it does feel a bit of a race to exchange.

This makes it tricky if you’ve found a house you want to purchase and now want to sell your house fast, but have to rely and wait on people buying your property in order to secure the funds move forwards.

Especially if you’re not a first time buyer, you’ll likely need to sell your home in order to buy your next one. However, now there is a fixed date for stamp duty returning to normal levels, relying on the open market can be a huge risk, especially if your buyer pulls out.

If you want to sell your house fast and take advantage of the stamp duty savings, get in touch with Vivo. Not only can we buy within 7-14 working days, but we also provide a secure, stress-free solution. As we buy with our own money and not part of any property chain, we are immediately proceedable and can buy right away. There are no last-minute surprises either. Accept our formal offer and your sale is guaranteed, with no last-minute surprises.

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