Sunday, February 16, 2025
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Stamp Duty Changes: What First Time Buyers Need to Know

The rise in Stamp Duty means a sudden extra cost for many first time buyers, explains Kay Hill

Liz Truss became the shortest-serving UK Prime Minister in history when she resigned in October 2022 after just 45 days in office, following a disastrous mini-Budget. She did, however, manage to achieve one good thing in her short tenure – a reduction in the dreaded Stamp Duty Land Tax (SDLT).

Not only did her Government raise the level at which the tax started, from £125,000 to £250,000, benefiting all buyers, she also improved the discount for first time buyers. Previously, first time buyers paid no SDLT on homes costing up to £300,000, and on homes up to £500,000 they paid nothing on the first £300,000 and 5% on anything between £300,000 and £500,000 (but more expensive homes incurred the standard rate). After the Budget, First time buyers paid nothing on the first £425,000 and then 5% Stamp Duty on any remainder up to £625,000, after which the standard rate became payable.

The political landscape has changed, however, and failing an unlikely last minute U-turn by the Chancellor, Rachel Reeves, both changes will expire at the end of March, costing all homebuyers an additional £2,500 and leaving first time buyers paying up to £11,250 more. This worst case scenario, according to AJ Bell, is for a first time buyer purchasing a property worth £625,000. During March this would qualify for First Time Buyer Relief, so the buyer would pay zero on the first £425,000 and 5% tax on the following £200,000 (total of £10,000). In April, however, First Time Buyer Relief would no longer apply, leaving the buyer paying the Government £21,250 just for the pleasure of buying a first home.

Jonathan Stinton, Head of Mortgage Relations at Coventry Building Society, says, “The Treasury is taking in huge sums of property taxes while homebuyers are racking up the debt. A Stamp Duty bill can be thousands of pounds, so if people don’t have that amount lying around they’ll probably need to borrow more to cover the tax on their home.” The inevitable rush to try to beat the deadline could also cause problems, “In the next few months, buyers will be increasingly likely to rush through purchases to avoid a hefty tax hike, causing a flurry of activity followed by a sharp drop after the relief has ended. This swell and burst effect isn’t going to help build long term stability in the market.”

So, is there anything that first time buyers can do in mitigation? Firstly, if you will be badly affected by the changes, you could consider if it is possible to complete your purchase before the deadline. The legal process of conveyancing takes, on average, between eight and 16 weeks, so unless you have already started, that ship may have sailed, especially for a more complex leasehold purchase. If you are a first time buyer purchasing a freehold new build or chain-free property, it might still be possible, but delays can occur with even the simplest transactions, so you will need a back-up plan to find the additional funds if anything goes wrong.

Another option would be to look for a home below the threshold – even in London, a recent search on Zoopla revealed just over 5,000 properties below £300,000 that would be SDLT-free for first time buyers. If you don’t qualify for legal FTB status, you’ll need to look further from the city to escape Stamp Duty – more than 12,000 homes under £125,000 are available, but mainly in the North, with pleasant one bedroom apartments in Nottingham and even a three bedroom end-terrace in Seaham, County Durham, coming in at under the threshold. You could also consider shared ownership, where you have the option to pay Stamp Duty on only the portion you are buying, and no further SDLT is due unless you staircase to 80%. Provided your initial share costs less than £125,000, there will be no Stamp Duty to pay.

If the changes to Stamp Duty mean you will need to pay it (or pay more), bear in mind that you can neither avoid, nor delay paying. While officially the buyer must pay SDLT within 14 days of buying a home, in almost all circumstances your solicitor or conveyancer will require the money before completion. The amount of Stamp Duty is based on the price of the building and fixed items like kitchens, but if you are buying extras such as carpets, blinds or furniture, make sure that your solicitor itemises these separately so they don’t form part of the Stamp Duty calculation.

If you have found your dream home, but won’t be able to complete in time, then you could try negotiating a discount, or ask a mortgage broker to find a sympathetic lender, as it might be possible to use part of your deposit towards the Stamp Duty and take a higher loan-to-value mortgage, or in some cases you might be able to add the Stamp Duty to your mortgage loan, although this will work out expensive in the long term.

Another change to Stamp Duty was an increase in the surcharge for those who already own a property, from 3% to 5%. It’s a measure designed to discourage second home purchase and buy-to-let, so it could depress house prices to the benefit of first time buyers. There are circumstances, however, in which it can catch people out. For example, if a buyer, or their partner, already owns a home, or a share in an inherited home or part of a property from a previous relationship (even if they don’t live there), they will have to pay the surcharge up front, although they can claim it back if they sell the previously owned property within three years. However, it means having a lot of extra cash in hand – from April, a £500,000 house that counts as a second home means a tax of £40,000 instead of £10,000 as a first time buyer or £15,000 as a standard buyer. The surcharge will also apply to someone buying with a parent who owns a home, if the parent’s name will be on the deeds. Labour promised in its election manifesto “to support first time buyers who struggle to save for a large deposit”, but Jonathan Stinton is not convinced, “Paying thousands in Stamp Duty could easily disincentivise any would-be buyers and keep people from moving up and down the ladder as freely as they would like.”

 

Kay Hill

Kay has been a professional journalist since her teens, working for local and regional newspapers, magazines and now websites as well. Kay work across a number of fields, including architecture, design, personal finance and the housing market – Kay enjoys making the complicated things in life a little easier to understand.As a consultant for PR company Building Relations, Kay has written for developers including Barratt London, Dandara, MTVH and Annington.  

Kay enjoys the beauty of language, the structure of grammar and the process of condensing thousands of words of research and interviews into 1,200 carefully chosen words that will leave the reader a little more informed than when they started. 

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