Transaction Tax – a guide to the new rules

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Transaction Tax – a guide to the new rules

The year 2020 has easily been one of the most challenging and indeed, odd, for recent generations to have lived through. Not only have we seen unprecedented lockdowns and closures of schools, we’ve also lived through the fear that only a deadly pandemic can bring. However, as well as the difficult, there have also been plenty of positives that can be focused on instead. Most of us have had the opportunity to spend more time with family and we have since chosen to prioritise this more going forwards.

This renewed focus on spending quality time with our loved ones (not to mention the extra time spent at home) has meant that more people than ever before are really considering their living spaces. We’ve seen a focus on home improvements but thanks to recent changes in legislation, the housing market has also seen a huge boom. In order to help the economy, the government has amended the rules on land and building transaction tax (LBTT) to make the climate more favourable for buyers. The new rules came into force on 15th July 2020 and will be in place until 31st March, 2021.

Explaining LBTT

Land and building transaction tax (LBTT) is a fee that house buyers must legally pay when you buy a property costing in excess of £145,000. Up to this value, you will be exempt from paying it but when you exceed this amount, the amount you pay will increase incrementally according the price you pay for your home.

The original rules were:

Up to £145,000 – 0% payable

From £145,001 up to £250,000 – 2% payable

From £250,001 up to £325,000 – 5% payable

From £325,001 up to £750,000 – 10% payable

Over £750,000 – 12% payable

If you are a first-time buyer, there are different rules which apply to you – you are exempt from paying transaction tax on properties up to the value of £175,000. Of course, if you are buying your first home, you can still benefit from the new rules which state you don’t need to pay LBTT on properties up to the value of £250,000.

If the purchase you were making was for a second property (in addition to your main residence or at least whilst keeping the original property), the thresholds differ. The extra tax you pay on this property is called the Additional Dwelling Supplement or ADS – this is an additional 4% on the standard residential property transaction tax. You are exempt on properties up to the value of £40,000 so the rates were:

Up to £40,000 – 0% payable

From £40,001 up to £145,000 – 4% payable

From £145,001 up to £250,000 – 6% payable

From £250,001 up to £325,000 – 9% payable

From £325,001 up to £750,000 – 14% payable

Over £750,000 – 16% payable

Transaction tax is only payable on new purchases, re-mortgaging your existing property won’t make you liable for payment of it.

So what are the changes?

A break in having to pay as much transaction tax was introduced on 15th July, 2020 and will remain in place until 31st March, 2021. This means that you can buy a property at an increased value before you need to pay this LBTT – up to £250,000. This is the same if you are a first-time buyer or are moving from one home to your next.

The new rates are as follows:

Up to £250,000 – 0% payable

From £250,001 up to £325,000 – 5% payable

From £325,001 up to £750,000 – 10% payable

Over £750,000 – 12% payable

When buying an additional house, you will be required to pay the transaction tax on properties which cost over £40,000. The rate you pay will be based on these new rates with an extra 4% added.

What do these changes actually mean?

In short, the changes mean that you can save money! If, for example, you were to purchase a home for £300,000, under the new rules you would pay £2,500 (0% on the first £250,000 and 5% on the remaining £50,000). Had you bought the property under the previous thresholds, you would be paying £4,600 (0% on the first £145,000 and 2% on the value up to £250,000 and 5% on the remaining £50,000).

If you are in a position to move, these savings can assist the process. For example, you could:

  • Put the money into savings in case you encounter any unforeseen costs
  • Put it into the new house by making some improvements to increase its value or tailor it towards your tastes
  • Reduce the amount you are borrowing by adding it onto your deposit and potentially decrease the interest rate you might have to pay

Our advice

Given these favourable conditions we would highly recommend you move now! The amount you can save is sizeable and as a result, many people are wanting to move. This could mean your ideal property will soon become available and you certainly wouldn’t want to miss out. The only stipulation is that you must complete the transaction before the period ends on 31st March, 2021.

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