Stamp Duty

Stamp duty was one of the first taxes to be levied in the UK by the Inland Revenue when it was formed in 1849.

It was first introduced in the UK in 1694 and, like income tax, was later brought in to pay for the war against Napoleon – but it proved to be such a nice little earner for the Government that it was never repealed.

However, the attempted imposition of stamp duty in the English colonies in America led to the outcry of “no taxation without representation” and the Boston Tea Party in 1773. In some ways, stamp duty led to the American War of Independence.

Sadly, since the Boston Tea Party, all UK subjects have paid stamp duty with little more than the occasional grumble.

Why we pay stamp duty

Rising property values since the mid-1990s mean stamp duty has raised ever-increasing amounts of money for the Exchequer. Figures published in November 2006 showed it raised £5.5bn in the 2004-05 tax year. This compares with just £670m a decade ago.

By contrast, the decision in December 2006 to raise the lower threshold from £120,000 to £125,000 means the Treasury is handing back about £40m in the coming tax year, and then £30m in each of the subsequent two years.

How much do we pay?

You pay up to 4 per cent in stamp duty – properly known as Stamp Duty Land Tax – when you buy property in the UK, whether leasehold or freehold. The rate charged goes up in stages.

You pay:

• Nil on properties costing up to £125,000
• 1% on properties costing between £125,001 and £250,000
• 3% on properties costing between £250,001 and £500,000
• 4% on properties costing £500,001 or more

You pay whichever rate applies on the full purchase price. For example, a £700,000 house would involve stamp duty of £28,000.

In his 2003 Budget, Chancellor Gordon Brown introduced the concept of “disadvantaged areas”, identified by postcode, where no stamp duty would be paid on residential property transactions up to £150,000.

No stamp duty is payable on non-residential transactions up to an unlimited amount. About 2,000 areas have been designated as “disadvantaged” enough to qualify for this relief.

To find out if your area qualifies, and to discover more about the rules, click here: http://www.hmrc.gov.uk/so/dar/dar-search.htm

Of course, as many people will be aware, “disadvantaged” or not, there are very few properties in London or the south-east of England that are priced at or below £150,000.

Carbon neutral homes

In December 2006, Chancellor Gordon Brown announced that newly built zero-carbon homes will be exempt from stamp duty until September 2012.

The move aims to give impetus to investment into zero-carbon communities — 27 per cent of carbon emissions in Britain come from homes. The intention is that no new home built after 2016 will contribute to climate change.

However, older homes, even if they could conceivably be converted into carbon-neutral ones, do not qualify, and new-build accounts for only 0.8 per cent of the country’s existing housing stock.

It is also unclear how the Government intends to measure energy consumption: the buildings, the occupants or the construction of the building itself. For example, there may be carbon spent creating the building materials. There may be carbon spent getting to and from the home. Experts point out that a badly insulated four-bedroom home occupied by six people is, per person, more efficient that a well-insulated four-bedroom home where only one person lives.

Is it possible to avoid or reduce stamp duty?

In previous years, some experts recommended “inflating” the price of fixtures and fittings to be left in the home, especially if the total cost of both placed a property only slightly above one of the stamp duty thresholds.

However, more recently, HM Revenue and Customs has clamped down heavily on this practice. All transactions are now closely scrutinised and prices of homes compared against others in the same area.

Nowadays it is highly unlikely that anyone would be able to get away with a price drop of more than a few thousand pounds.

In turn, it means that even at the highest four per cent rate where the purchase price is in excess of £500,000, the actual saving on duty payable through such a wheeze would not amount to more than a couple of hundred pounds.