While many new property owners may want to avoid stamp duty on second homes, the option is not feasible for everyone. Avoiding stamp duty might lead to an HMRC investigation into tax avoidance or evasion.
Still, there are ways to reduce or avoid stamp duty tax liability. In some cases, the exceptions are straightforward, like buying a low-valued home for the first time. Sometimes you must tread carefully to avoid getting in trouble with the HMRC.
What is Stamp Duty?
Is there a way to avoid stamp duty? Image via Flickr by House Buy Fast.
Stamp Duty Land Tax (SDLT) is a government tax you pay when purchasing a property or land over a certain amount in England and Northern Ireland.
The current threshold is £250,000 for residential and £150,000 for commercial land and properties. This means you don’t pay stamp duty for homes priced below that price.
You’ll pay stamp duty for the following:
- Leasehold property: property that sits on land that’s on lease
- Freehold property: property that sits on the land you own
- Shared ownership scheme property
- Land or property transferred to you as inheritance, shares in something, or settlement
You still pay stamp duty even if you buy a home through a mortgage or cash. So, when budgeting for your next home or buy-to-rent investment, factor in stamp duty charges.
How Much is Stamp Duty
If you’re a first-time home buyer, you might get away with reduced rates or paying no stamp duty. However, you cannot avoid paying stamp duty for second homes unless your property is below the threshold.
Stamp duty thresholds differ depending on whether you’re buying the property in England, Northern Ireland, Wales, or Scotland or if you’re a UK citizen.
Calculate the current stamp duty amounts for first-time residential property buyers as follows:
- England and NI: 0% for the first £425,000, plus 5% for the next £625,000, plus 10% for the next £575,000, and 12% for the remaining portion above £1.5 million.
- Wales: 0% for the first £225,000, plus 6% for the next £175,000, plus 7.5% for the next £350,000, plus 10% within the next band up to £1.5 million, and 12% over that.
- Scotland: 0% for the first £175,000, plus a normal percentage for property values above that. This means you save £600 from your normal charges.
For second homes, your stamp duty thresholds will be as follows:
- England and NI: You pay 3% for homes valued up to £250,000, 8% for the next £675,000, 13% for the next £575,000, and 15% for properties over £1.5million.
- Wales: You pay 4% for homes valued up to £145,000, 6% for the next £105,000, 9% for the next £75,000, 14% for the next £425,000, and 16% for properties over £750,000.
- Scotland: You pay 7.5% for homes valued between £180,001 and £250,000, 9% for those ranging from £250,001 and £400,000, 11.5% for those between £400,001 and £750,000, 14% for those between £750,001 and £1.5m, and 16% for homes valued over £1.5m.
Is There a Way to Avoid Stamp Duty?
Stamp duty can make buying a home quite expensive. However, it’s often unavoidable, and you must pay tax as part of the property purchase.
Still, there are tips to reduce or avoid paying the stamp duty. These include:
1. Buy a Cheaper Property
Homes worth under £125,000 aren’t subject to stamp duty tax. So, the simplest way to avoid it is by investing in cheaper properties that don’t meet this threshold.
There are several ways to do this. You can search for houses marketed for less than £250,000, even outside your area of preference. You can also consider different bandings, as lower bands typically translate to lower stamp duty.
Many agents know that thresholds make a difference to potential buyers. Rather than marketing houses at £250,000, they’ll lower the price to about £249,995, as this remains in the first tier of stamp duty.
2. Bargain on the Property Price
Another great way to avoid stamp duty is by bargaining the property’s asking price. A lower asking price can help you avoid a higher tax band.
You can also negotiate with the property seller to split the cost of the stamp duty with you. Some sellers will reduce the cost of the property proportionately to help you cover the costs.
3. Get another person to become a first-time buyer
Suppose you’re buying a second property for a family member or friend. You can avoid paying second home stamp duty by using their names on the deed.
For a relative, you can gift them money for the house deposit. If they pass the requirements for a mortgage, the property will be registered under their names. It might remain their primary residence, but it’ll also be your second home.
You can also sign for a family member’s mortgage or loan as a guarantor. You won’t be the legal owner of the property, but it can be useful as your second home.
However, you’re liable for covering the mortgage repayments if your family member cannot pay for themselves.
4. Transfer a property
If someone transfers a property to you mortgage-free, either as a gift or inheritance, you don’t need to pay stamp duty for the property’s market value.
Alternatively, if you split up with your spouse or civil partner, you can buy their share of your jointly-owned home. However, if you take responsibility for the mortgage for the property, you might also need to pay for stamp duty.
5. Purchase A Mobile Home
Mobile homes such as caravans and houseboats can be a great alternative to physical property. They’re also a great way to avoid stamp duty, as you’re not liable to pay any.
However, this might not be viable for people looking to invest in buy-to-let properties. Finding tenants for mobile homes is harder than other forms of housing.
6. Pay for fixtures and fittings separately
Removable fixtures and fittings such as carpets, curtains, ovens, and furniture are not subject to stamp duty taxation. You can ask the property seller to pay for them separately to lower the property price.
Once you agree with the seller on a reasonable sum, subtract the amount from the purchase price. However, it’s good to seek advice from a competent lawyer or conveyancer to avoid getting in trouble with the HMRC.
7. Build your own
If you’re a DIY enthusiast, you might enjoy custom-designing your house. This can prove cost-effective, as buying a piece of land without a building permit is much cheaper.
You only pay for the stamp duty for the piece of land rather than the value of the finished property.
8. Purchase a buy-to-let as a first-time buyer
Buy-to-lets are often considered second homes and charged second-home stamp duty accordingly.
You won’t have to pay for second-home stamp duty if you’re a first-time buyer. You might also qualify for first-time buyer stamp duty rates.
However, if you buy the buy-to-let with someone who’s not a first-time buyer, you’ll be treated as a single unit, so you’re liable for second-time stamp duty.
9. Take advantage of Stamp duty holidays
Occasionally, the government increases the threshold for stamp duty. For instance, there was a stamp duty holiday from July 2020 to March 2021 across the UK.
You’d pay no stamp duty if your home were valued at less than £500,000 in England and Northern Ireland and £250,000 in Scotland and Wales. This often translates into a lot of savings for property buyers.
10. Claim back stamp duty
Sometimes, you might be entitled to a stamp duty tax refund. For example, if you bought a new home while still waiting to sell your primary residence, you can claim back some of the higher rate stamp duty tax.
If you sell your home within three years of purchasing another, submit a stamp duty tax refund within three years of making that sale to get a tax refund.
However, you cannot get a refund if your original property exceeds the three-year limit. When submitting your form, include information regarding both properties, the property you’re selling, and the amount you’d like to claim.
Conclusion: Is There a Way to Avoid Stamp Duty?
Despite the mounted efforts by politicians to switch liability for stamp duty from buyers to sellers, there’s no sign of that happening soon.
While looking for ways to avoid stamp duty, be careful not to fall for stamp-duty mitigation schemes. The HMRC scrutinizes all sales where the sale price is at or just below the threshold of stamp duty.
If you underprice fixtures and fittings, you could face charges for fraudulent attempts to tax evasion.