Buying a house means keeping tabs on every last penny of your budget – and that means the taxes you can be charged during and after the process too.

Plus, you have a legal requirement to pay these taxes, so any late or missing payments could lead to issues with the tax authorities. Nobody wants that.

To help you stay on top of things, let’s dive in and explore your tax liabilities in the home buying process. We’ll be focusing mostly on stamp duty, which is the main tax to understand. But we’ll also explain another one to keep an eye on if you sell your home later: Capital Gains Tax (CGT).

What is stamp duty? 

Stamp duty, or “Stamp Duty Land Tax”, is tax paid to HMRC (Her Majesty’s Revenue and Customs) when you’re purchasing a new property. In Scotland, this tax is known as Land Building Transaction Tax (LBTT), and in Wales, it’s known as Land Transaction Tax (LTT).

You’re still liable to pay stamp duty whether you paid for the property outright or with a mortgage. This tax is applied to both leasehold and freehold properties. A leasehold property means you only own the house for a specific number of years, and then once those years are over, the property goes back to the owner (freeholder). A freehold property means you have outright ownership of the property indefinitely. 

Generally, any residential property that costs less than £40,000 doesn’t qualify for stamp duty. There are a few other exemptions, which you can see on the HMRC website

Who pays stamp duty?

The owner of the property pays stamp duty. In many situations (though not all), your solicitor or conveyancer will pay the stamp duty and add it to your bill as a “disbursement,” which is an expense your solicitor or conveyancer initially covers – but that you pay back – to speed up the home buying process.

How much does stamp duty cost? 

The cost of stamp duty can vary based on a few different factors:

  • How much the property is worth
  • Where the property is located (rules differ between UK nations)
  • Whether the property is your first purchase
  • Whether you have other properties in your name

Use our handy online stamp duty calculator to estimate how much stamp duty you’ll need to pay when you buy a home. This is the most up-to-date way to figure out how much stamp duty costs, because the rules can change. 

When should you pay stamp duty? 

You’ll have to file a stamp duty return to HMRC within 14 days of completing the legal and financial processes of buying a home. If you don’t make a payment within 30 days, you’ll be charged a penalty, which can be as much as 30% of the stamp duty value.

Even if you’re exempt from stamp duty, you still have to file a return to prove that you don’t owe this tax on your property. Your conveyancer can help you with this.

This is something we can guide you through when you choose Habito’s home-buying service.

First-time buyer exemption from stamp duty land tax

There are some great exemptions for first-time buyers, although we recommend you check out our free online stamp duty calculator for the most updated information. 

At the time of writing, first-time buyers don’t have to pay stamp duty for properties valued at less than £425,000 in England and Northern Ireland. For properties between £425,001 and £625,000, you’ll be paying 5% of the value as stamp duty tax. Any value higher than £625,000? Then first-time buyer exemptions don’t apply – you’ll be charged according to the standard rates.

In Scotland, the threshold for paying stamp duty (Land Building Transaction Tax) as a first-time buyer is £175,000, while in Wales, there’s unfortunately no tax relief for first-time buyers.

Additional property charges 

Buying an additional property, whether as a second home or for buy-to-let purposes (in other words, to rent out to tenants), carries an additional stamp duty cost. 

In England and Northern Ireland, you’ll need to pay an extra 3% of the stamp duty charge on an additional property. Properties are classified as “additional” if they aren’t your main residency.

If you own more than one property, it can be tricky to define which of the properties is your main residency. HMRC provide a helpful explanation of "main residency" here. 

In some cases, you can legally avoid paying the additional stamp duty if: 

  • The property is worth less than £40,000
  • The property is “moveable,” such as a houseboat or mobile home
  • The property has less than seven years left on the lease
  • You’re inheriting 50% or less of the property share

Also, if you sell your main residence within three years of purchasing the new one, and the additional property becomes your main residency, you can request a refund of the stamp duty charge you paid. That’s for homes in England, Northern Ireland, Wales, and Scotland.

In Wales, the rates of additional properties increase according to the value of the property:

Value of property Rate in Wales
Up to £180,000 4%
£180,001 up to £250,000 7.5%
£250,001 to £400,000 9%
£400,001 to £750,000 11.5%
£750,001 to £1.5m 14%
Over £1.5m 16%

In Scotland, the additional charge, known as an LBTT Additional Dwelling Supplement (ADS), is 4% of the value of the residential property. 

Stamp duty on leasehold properties

Say you’re buying a property that has a new lease, or you have an “unassigned” lease, you’ll need to pay an extra 1% charge in addition to stamp duty. This will only apply if the rent you will pay over your lease period is more than £125,000. 

An unassigned lease is a lease on a property that has been divided up. For example, when an older property has been divided into smaller properties and those smaller properties have new leases.

Stamp duty on fittings and fixtures 

Stamp duty only applies to fittings and fixtures attached to the property, like built-in wardrobes and kitchen fittings – not removable objects such as carpets and curtains. 

In some cases, the price of removable fixtures is included in the value of the property. Here, you can reduce the stamp duty bill by figuring out the price of the removable object(s), usually with the seller’s help, and remove it from the total cost of the property. 

You’ll need to justify any deductions made to the property value, so you must use a realistic approach and apply a price that considers the quality and age of the fixture or fitting.

Adding stamp duty to your mortgage 

Buying a property can be expensive. If you’re in a position to buy, you can choose to use your mortgage to cover your stamp duty bill. Basically, you can borrow more to cover this cost by calculating the amount of stamp duty you’ll owe and increasing your mortgage. 

However, it’s important to remember that you’ll have to pay interest on the extra costs on your mortgage – which will add up over time. Additionally, if adding stamp duty cover pushes your loan-to-value rate up, your interest rate might increase. 

What is loan-to-value? A loan-to-value (LTV) ratio is used by lenders to compare the amount you’re asking to borrow (the loan) with the value of the property you want to purchase. 

For example, let’s say you want to buy a house for £150,000 and have a 10% deposit. That means you’d need to borrow £135,000, putting your LTV at 90% (135/150 x 100). Generally speaking, the lower your LTV, the lower the interest rate.

Capital Gains Tax (CGT)

If at any point you’re looking to sell your property (for example, if you’ve bought a second house and want to sell the first house), you’ll need to pay Capital Gains Tax. This tax is applied to the difference between the amount you originally bought the house and the selling price. 

The rate will depend on your income tax bracket. If you’re a higher or additional ratepayer (earning more than £50,271), you’ll pay a rate of 28%. If you’re a basic rate payer earning between £12,571 to £50,270, your tax payment will depend on how much you’ve gained from the sale of the property and your taxable income. 

You might be exempt from paying Capital Gains Tax if you’ve been living in the property or you’ve ever lived in the property. This is known as Private Residence Relief

You can read more about capital gains tax on the HMRC website

Keep an eye on your budget with our complete home-buying service

It’s often easier to budget when you know how much everything is going to cost up front. That’s where Habito can help. Our complete home-buying service is with you every step of the way, and your fees are locked in from the start. 

Our fee includes your legal and conveyancing costs, like your land registry fee, property searches and transferring the money to the seller. It also includes a property survey, which shows you if the property has any problems before you buy (things like damp, for example). If the survey does find problems, we’ll help you figure out the smartest next steps.

Your own Habito specialist will guide you through the whole process and confirm everything’s legit (and check any other third-party fees) with you, so you won’t get any nasty surprises.

Want to learn more about Habito? Get started here.