Stamp duty guide for first time buyers Lifetise

First-time buyers, rejoice! If you’re buying a property for less than £300,000, then you don’t have to pay any stamp duty. Saving you up to £5,000.

Read on to find out how to take advantage of the new stamp duty rates for first-time buyers.

Update: November 2020 – Please note that there is currently a stamp duty holiday in place, so if you’re spending under £500k, you won’t pay any stamp duty if you buy before 31 March 2021.

Simple guide to stamp duty

You’re here because you want to know about stamp duty. This article is the simplest guide you’ll find to stamp duty in England & Wales for residential buildings.

We’ve created it alongside our HomeFinder tool. HomeFinder helps you work out how much you can afford to spend on a home (including how much stamp duty you’ll pay) and where you can afford to live.

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What is stamp duty?

Stamp duty is a tax that you have to pay every time you buy a property. It’s calculated based on the purchase price of the property. So, the more expensive the house or flat you’re buying, the more stamp duty you’ll pay.

Stamp duty often catches people out, particularly first-time buyers, who don’t realise that they have to pay this on top of their deposit. It can be thousands or tens of thousands of pounds, so it’s really important to know in advance how much you’ll need to save.

What is stamp duty

Who has to pay it?

Anyone who is buying a residential property in England and Wales costing more than £125k has to pay stamp duty.  It only applies to buyers (not renters).

There are different rates that apply if you’re a first-time buyer. There are also different, higher, rates that apply if you’re buying a second or additional home (including buy-to-lets).

You’ll pay stamp duty on every home that you buy in your lifetime. So if your first step on the property ladder is buying a one bedroom flat and then you want to buy a family home five years later, you’ll pay stamp duty on each purchase.

How much stamp duty will I pay?

The way that stamp duty is calculated is a bit complicated.

Think of cutting your property price into different “slices”. Each slice has a different tax rate that applies only to that slice. You first calculate the tax that applies to each slice, then you add all the slices together, to work out your total stamp duty. The more slices you have, the more tax you pay.

Here are the standard stamp duty rates (not first-time buyers or additional home buyers):

Property price Stamp duty rate
First slice: up to £125,000 0%
Second slice: from £125,000.01 to £250,000 2%
Third slice: from £250,000.01 to £925,000 5%
Fourth slice: from £925,000.01 to £1,500,000 10%
Fifth slice: over £1,500,000.01 12%

And here’s an illustration to show you how the stamp duty calculation works.

Stamp duty calculator

In our example, you’re buying a £650,000 home.

The first £125,000 slice is taxed at 0%, so the stamp duty on that slice is £0.

The second £125,000 slice is taxed at 2%, so the stamp duty on that slice is £2,500.

The third and final slice of £400,000* is taxed at 5%, so the stamp duty on that slice is £20,000.

Total stamp duty: £22,500

*(£650,000 – £125,000 – £125,000) = £400,000

See what you can afford to spend on a home

Think strategically about stamp duty

The different slices mean that you need to think strategically about how much you want to spend on a home. If the asking price on a property tips you into the next rate bracket, you’ll probably want to negotiate with the seller to get the price down, so you’re not throwing money away on tax.

It’s no coincidence that the biggest slice (no. 3, for property prices between £250k and £925k, accounts for the majority of homes in the UK). It’s part of the reason why the government has earned nearly 3x more from stamp duty since 2008 (over £8 billion in 2016 – 2017)!

When does stamp duty have to be paid?

You’ve got 14 days from completion (when the property is legally yours) to pay the full amount of stamp duty. There is a form that has to be completed and submitted to HMRC along with your payment.

Usually your solicitor will do this for you, and will ask you to transfer the full amount payable to them before completion, so they know that you’re good for the money. This means you’ll need to have your whole stamp duty amount saved by the time that you complete the purchase.

Don’t miss the deadline. You’ll be charged penalties and interest!

You have 30 days to pay stamp duty after completion

Can I add stamp duty to my mortgage?

Some mortgage lenders do allow you to add the amount of stamp duty to your mortgage. We don’t recommend it, as it will be lumped together with your mortgage amount and you’ll have to pay interest on it at your standard mortgage rate. Over an average 25 year mortgage term, this can cost you a lot of money in unnecessary interest payments.

Also, adding this extra amount onto your mortgage can affect your loan-to-value (LTV) rate (the % of your mortgage as a proportion of the purchase price).  Your LTV dictates what interest rate you’ll pay on your mortgage and how many banks are willing to lend to you.

If you find that you can’t afford the stamp duty upfront, then you might be better off looking at properties with a lower purchase price, or waiting a few months until you can save for the stamp duty.

How long will it take me to save for a deposit

New rates for first-time buyers

The 2017 Budget brought in new rules for first-time buyers that are supposed to help more people get onto the property ladder by reducing the amount of stamp duty you’ll pay if you spend less than £500,000 on a property.

Here are the new rates:

What does this mean for first-time buyers?

Let’s do a walkthrough, with a fictional couple, Sam and Mina, so you can see how this works.

first time buyers

They’ve been saving for their own place for a couple of years. At first they tried living with Sam’s parents, to save more money, but Mina felt weird that Sam’s mum was doing her washing, so they moved into a studio flat.

Now they’re expecting a baby, and are about to outgrow the studio. Mina really wants to be settled in their own house by the time the baby arrives in 6 months. Sam’s taking the pressure well.

Get on the property ladder

They’ve been pretty disciplined about saving. Cutting down on nights out (it helps now Mina’s not drinking) and takeaways. Mina got a promotion in Feb and she put all the extra money she got each month into their savings account.

They’ve managed to save £33,000 for a deposit. But they’re worried about stamp duty.

how to save for stamp duty

The good news is that they’re both first-time buyers. Neither has owned any other property before (either in the UK or abroad).

So they will not pay any stamp duty if they spend less than £300,000 on a home, and only 5% on the difference, if they spend between £300,000 and £500,000.

new stamp duty rates for first time buyers

Ok, that’s nice, but how realistic is it that they’ll find somewhere under £300k in Bristol? Ideally, they want a 3 bedrooms house, not too far from the City Centre, where Sam works.

According to research by HouseSimple, 65% of properties in Bristol cost less than £300k. So they are in a much better position than first-time buyers in Cambridge (17%) or London (only 5%).

properties for first time buyers in UK

Our happy couple found the perfect 3 bed Victorian terrace on the Bath Road. They paid £330,000. This is £30k over the zero rate threshold, so they only had to pay £1,500 in stamp duty (£30,000 x 5%).

How does this compare to the standard stamp duty rates?

Sam and Mina’s house cost £330,000. Under the standard rates:

The first £125,000 slice is taxed at 0%, so the stamp duty on that slice is £0.

The second £125,000 slice is taxed at 2%, so the stamp duty on that slice is £2,500.

The third and final slice of £80,000* is taxed at 5%, so the stamp duty on that slice is also £4,000.

Total stamp duty: £6,500

*(£330,000 – £125,000 – £125,000) = £80,000

Save on stamp duty as a first time buyer

Mina and Sam saved £5,000 on stamp duty. Which meant they could buy a place much sooner than they expected, in time for them to welcome little Malia into their family.

happy first time buyers

How much should I spend as a first time buyer

Who a counts as a first-time buyer?

To be a first-time buyer, you can’t:

What if I’m spending more than £500k as a first-time buyer?

You have our sympathies. That’s a serious chunk of money to be spending on your first home. Unfortunately, you don’t get the benefit of the new rates and the standard rules will apply to you.

That means that if you’re looking at properties just over the £500k threshold, you’re going to want to use all your charms to get the sellers to drop their price to £500k or less.

Here’s why:

A £500,000 home for a first-time buyer will cost you £10,000 in stamp duty (under the new rates).

A £505,000 home for that same buyer will cost £15,250 in stamp duty (under the standard rates).

That £5k bump in house price just cost you the same in tax.

Stamp duty on second homes / additional properties

Wanting to buy a holiday home? Thinking of becoming a landlord? Looking at taking out a joint mortgage with your kids to help them get on the property ladder?

Watch out, as stamp duty rates on additional properties over £40,000 have an extra 3% tax surcharge whacked on.

Additional Property price Stamp duty rate
Exempt up to £40,000 0%
First slice: From £40,000.01 to £125,000 3%
Second slice: from £125,000.01 to £250,000 5%
Third slice: from £250,000.01 to £925,000 8%
Fourth slice: from £925,000.01 to £1,500,000 13%
Fifth slice: over £1,500,000.01 15%

When will the higher rate tax apply to additional properties?

The net has been cast widely, so all of the following situations would be caught by the higher rate tax:

What about if I buy a second home with the intention of replacing my current home?

Sometimes, people find their new dream home before they’ve managed to sell their old one. If that’s you, then as long as you complete the sale on your old property within 3 years of your purchase of the new property, then you can apply for a refund of the higher rate stamp duty.

You can find details on how to claim your refund here. HMRC may ask you for proof that the new property is your “main residence”, in which case you’ll need to show them:

How does the higher rate stamp duty affect buy-to-let?

If you are buying an additional property with the intention of letting it out, or have a dream of owning a Robbie Fowler-style portfolio of rental properties, then you’ll have to pay the higher rate tax on each property you buy.

This, combined with the lowest rental yields since 2001 (5%), and the abolition of the ‘wear and tear’ allowance for furnished properties, is making buy-to-let a far less attractive nest egg for amateur landlords.

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