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A look at Stamp Duty for Shared Ownership Purchases

Andrew Theoff from Direction Law, one of Family Mosaic’s panel solicitors, looks at the complex area of stamp duty in relation to Shared Ownership purchases.

What is stamp duty in the UK?

Stamp Duty or, to give it its correct term, Stamp Duty Land Tax (SDLT for short) is a tax payable on all property transactions. It is usually the largest cost associated with a house purchase, often costing buyers more than the fees they pay to their solicitors, mortgage advisors and valuers combined. Calculating SDLT on a purchase transaction is usually straightforward, but the rules associated with SDLT on Shared Ownership properties are rather more complicated.

How much is stamp duty in the UK?

The usual rates of SDLT payable are as follows:

  • First £125,000 of purchase price: Nil
  • Portion from £125,001 to £250,000: 2%
  • Portion from £250,001 to £925,000: 5%
  • Portion from £925,001 to £1,500,000: 10%

If you are buying a resale property then you pay stamp duty at the above rates, calculated on the price you are paying for the share that you are buying.

What is stamp duty for Shared Ownership?

If you are being granted a new Shared Ownership lease, for example the purchase of a new build property, then you have the option of either paying stamp duty on the full market value of the property or paying duty on the price being paid for the initial share and on the specified rent payable per annum.

Paying stamp duty on the full market value of the property

The benefits of paying stamp duty on the full market value of the property when buying Shared Ownership is that once you've done that, there will be no stamp duty to be paid every time you staircase (i.e. buy another 'chunk' of your property). 

Stamp duty on market value between £125,000 and £250,000

If you choose to pay your stamp duty on the full market value and the value of your property is between £125,000 and £250,000 you pay 2% of the amount by which the value exceeds £125,000 (so, for example if the value of your flat is £200,000, you pay 2% of £75,000). You will not pay any additional stamp duty on any future staircasing transactions.

In practice, finding a property below £250,000 in London might be difficult. It is more likely that you will have the option to pay...

Stamp duty on market value over £250,000

If the value of your property falls into the £250,000 - £925,000 bracket, your stamp duty will be calculated as: 0% on the first £125,000, 2% on the next £125,000, and 5% on the following £675,000. If the value of your property exceeds £925,000, additional 10% stamp duty will be paid on any additional value up to the price of  £1,500,000.

Why pay stamp duty on the full market value of the property?

Buyers may wish to pay stamp duty up-front to enjoy the peace of mind in the future, especially if it is likely that their property will considerably increase in value. Most Shared Ownership buyers, however, choose not to follow this route for two reasons:

  • paying stamp duty on the full market value of the property tends to be quite expensive and unaffordable for many Shared Ownership buyers,
  • paying stamp duty on the share value plus rent often offers more flexibility for the buyers. 

Paying stamp duty on the share value plus rent

When you choose this option, you pay stamp duty on the first 'chunk' of your property, but then you are exempt from tax on all intermediate staircasings up to the 'final' staircasing, which for the purpose of stamp duty is defined as any staircasing above the 80% value of the property. 

So in practice, you can purchase an initial 30% share of your apartment, pay stamp duty on that, then staircase in chunks of 10% - without paying anything - and then start paying stamp duty again once you've reached 80% ownership of your property. 

In this scenario you calculate the amount of stamp duty you need to pay by:

Calculating stamp duty payable on the share element

You take a look at the price you’re paying for your share and you pay duty on that in accordance with the rate table specified above

Calculating stamp duty on the rent element

In order to calculate the amount of stamp duty you need to pay on the rent you first need to calculate something called the "net present value". You do that by putting in details of the lease term and the annual rent into the .Gov website.

That “net present value” is then taxable at a certain rate, and that tax gets added to the duty on the premium to give you the initial duty on the share when you first buy. That is how you calculate the stamp duty payable on the initial share purchase. 

When you next need to pay stamp duty on transactions over 80% share ownership, you will need to add: 

  1. the amount you paid for your first share,
  2. the prices you paid for all the shares in between in the intermediate staircasings,
  3. the price you pay for the final share

The result will give you the total amount that has been paid over the years for the property. You then work out the stamp duty payable using the bands listed above and then you work out what proportion of that price is attributable to that final staircasing transaction that’s taxable. 

So if overall you’ve paid £800,000 and you are paying for the last bit of £150,000, you work out what percentage of 800 150 is and tax payable on that final staircasing transaction is that percentage of the total tax that you’ve just worked out. 

The process of calculating stamp duty payable is very complicated so it's always better to entrust it to experts. All conveyancing solicitors will know and understand how to apply the stamp duty rates and thresholds to an ordinary property purchase, however most solicitors will almost certainly know nothing about the complexities that apply to Shared Ownership properties. This is therefore one of many good reasons why you should use one of the firms of solicitors who are on Family Mosaic’s panel for your Shared Ownership conveyancing transaction. Family Mosaic’s panel solicitors all specialise in affordable housing matters and will therefore be able to advise you fully on the stamp duty issues involved.