Saving on Stamp Duty

Buy property worth less than £125,000!

The old nil stamp duty band of up to £60,000 was doubled to £120,000 in 2005, and then raised again to £125,000 to help first time buyers onto the property ladder. So if you buy property under £125,000 no stamp duty is paid.

Key Fact

More than £4.1 billion was charged in stamp duty in the tax year to April 2002 - a figure that has almost quadrupled from just over £1 billion five years previously.


Example: Stamp Duty (1)

Mr Khan buys three properties. The first property costs £125,000. The stamp duty rate for this is 0% and therefore he has to pay nothing extra.

The second one costs £130,000 and he has to pay £1,300 in stamp duty.

The third property is a more expensive £260,000. The stamp duty rate on this is 3% and therefore he has to pay £7,800 on this one.

Alternatively, you can buy a new property as a ‘shell’ for a value of less than £120,000 (thereby saving on stamp duty) - and sign a separate contract with a builder to carry out the necessary work to make it a living space.

It is important to ensure the two contracts are entirely separate if you go down this route. If the contracts are linked in any way you will find yourself liable for stamp duty.

Buy in a stamp duty exempt area

The Inland Revenue has made some deprived areas throughout the UK exempt from stamp duty. You will not have to pay stamp duty unless the property value is over £150,000 in these places.

The Inland Revenue states that:

‘The areas that qualify for the relief are the most deprived, as determined by the indices of deprivation in each of the four nations that comprise the United Kingdom. In England and Scotland the poorest 15% of wards and postcodes qualify. In Wales and Northern Ireland the poorest 42% of wards are designated as disadvantaged.’

There are over 2,000 regions where stamp duty is exempt for houses priced up to £150,000.

To find a list of all the deprived areas where stamp duty is exempt please use the links in the following table:

England www.inlandrevenue.gov.uk/so/england.pdf

Northern Ireland www.inlandrevenue.gov.uk/so/nireland.pdf

Scotland www.inlandrevenue.gov.uk/so/scotland.pdf

Wales www.inlandrevenue.gov.uk/so/wales.pdf

The Inland Revenue has also provided a disadvantaged areas relief search tool.

This search tool allows you to enter the postcode of the property you are looking to buy. It will then tell you if the property is a deprived area.

www.inlandrevenue.gov.uk/so/pcode_search.htm

This means that another selling point on your property could be that you can tell the buyer that they will not have to pay stamp duty!

Be careful, as not all solicitors know that stamp duty is exempt in certain deprived areas.

It is always worthwhile checking if you have paid stamp duty in a deprived area, as the Inland Revenue will not tell you that an area is exempt from stamp duty. If you have incorrectly paid stamp duty, then you must contact the Inland Revenue to claim it back.

Buy six or more properties in a deprived area!

Investors who buy six or more properties are allowed stamp duty relief on any transaction in a disadvantaged area – even where these purchases exceed £150,000.

NOTE: The government has abolished stamp duty exemption for commercial property in deprived areas from 1 July 2005, and stamp duty land tax also joins the income tax anti-avoidance disclosure rules.

So, if you deal in commercial property over £5 million you need to talk to your advisers about stamp duty avoidance measures.

Negotiate below stamp duty thresholds to save

 cash

If your property is close to a threshold level, it is always worthwhile negotiating to try and reduce your stamp duty liability.

This is particularly the case if you are purchasing a property and the vendor is leaving behind certain fittings and furnishings.

Example: Stamp Duty (2)

Mr Jo Jaffa sees a house advertised for £259,000. When he goes to view the property he realises that the vendor has numerous furnishings that she will be leaving. These include: carpets, curtains, light fittings, fitted robes in bedroom and dining furniture.

The estimated cost of these items is £5,000. Mr Jo Jaffa agrees with the vendor to pay for the furnishings separately and negotiates another £5,000 off the purchase price.

This means that the agreed purchase price is now £249,000 and his stamp duty liability is £2,490. Had he purchased the property at the full asking price then his liability would have been £7,770.

By paying for the items separately and negotiating a further reduction, Mr Jo Jaffa has saved £5,280.

This means that the furnishings are essentially for free!

Key Tip

Always try to negotiate on any property deal. This case is made even stronger if you are close to a stamp duty threshold level.

Buy live/work units and avoid tax

If you buy a live/work unit where the ratio of the live to work area is weighted in favour of the work area you can avoid stamp duty.

That’s because stamp duty is only payable on the area considered habitable.

This works on the same principle as buying a shell and then negotiating a separate contract for the necessary building work to make the shell a habitable environment.

Example: Stamp Duty (3)

Mr Jo Jaffa chooses a live/work unit that costs £257,500. This unit is internally divided heavily in favour of work space – 60%.

Only the habitable space is considered for stamp duty liability – 40% of £257,500 – which falls well below the stamp duty threshold of £125,000.

So Mr Jo Jaffa avoids stamp duty on a property where it could have been 3%. His saving is £7,725. Now he can afford that new kitchen!

Keep transactions single if buying in bulk

If you are buying more than one unit in a building, you can reduce stamp duty significantly by keeping each transaction separate.

So, if you bought four units at say £115,000 each in a single building, you would pay no stamp duty as each individual unit comes below the £125,000 stamp duty threshold.

If the transactions are linked, the purchase price is taken as a whole at £460,000 for the four units. There would be a stamp duty liability of 3% - or £13,800.

Be very clear with developers and your solicitor that your transactions are not to be linked.

Key Tip

Make sure your solicitor knows if you are buying in a stamp duty exempt area. If you are buying a shell and then contracting out the work ensure your solicitor keeps these transactions separate.

Buy as a company and save money

It is possible to set up a limited company to buy and hold a property and to sell the company (i.e. the property) on, thereby saving on normal purchase stamp duty rates.

Instead of the normal stamp duty thresholds applying, the rate for a company is 0.5%.

If you were in the higher price bracket of £500,000 where 4% stamp duty is applied, you would save £17,500, paying just £2,500 in company stamp duty rather than £20,000!

Buying as a company has other advantages and disadvantages, so you should seek solid professional advice before setting up a property company.

Fill in your own stamp duty land tax return and

 save on legal fees

The Inland Revenue requires stamp duty land tax returns to be submitted within 30 days of the completed transaction.

Most people rely on their solicitor or accountant to fill in and return the forms – after they have checked and signed it.

However, it is a simple form to fill in and you can do it yourself thereby saving on solicitor’s or accountancy fees for submitting the return on your behalf.

Ensure you meet the Revenue’s deadline and file the return with 30 days of completion. If you don’t, you are instantly fined £100. Fail to file within three months and this becomes £200; interest is charged on money owing too.

You can now submit your Inland Revenue information online. For full information on how to fill in and submit stamp duty land tax returns, visit the Inland Revenue website.

www.hmrc.gov.uk/so/sdlt_website.htm

Conclusion

Congratulations! You now:

• Understand ways to save on stamp duty by buying under the threshold, or by buying ‘shells’
• Understand how to pay no stamp duty on residential property in deprived areas
• Understand how you can negotiate prices below the stamp duty threshold
• Understand the stamp duty savings on live/work units
• Know how to save money by keeping transactions single in bulk deals
• Know that you can save on stamp duty by buying property as a limited company
• Can consider filling in your own stamp duty land tax returns to save on professional fees