Swapping family homes for something smaller and more manageable at retirement is a common trend. You may also choose to move to a smaller property to reduce your household bills, such as energy and council tax.
Yet during this process, the cost of stamp duty can add up to thousands of pounds and wipe out a portion of any profit you make. When downsizing, every penny counts. You need a secure retirement income, so check how big a hole this tax will burn in your pocket.
There have been calls to scrap this tax for those downsizing but currently it’s still an important cost to factor into any move.
Please note: A higher rate of stamp duty applies to the purchase of second homes and additional properties. Read more here.
What are the rules?
Stamp duty rates changed in December 2014. The amount is tiered, like income tax. Put simply, you don’t pay any stamp duty on the first £125,000. You pay 2% on the portion up to £250,000, and 5% on the portion up to £925,000. Then, up to £1.5 million, the rate is a massive 10%, or 12% on anything over this sum.
How does this work in practice?
Let’s take an example of a £180,000 property purchase. You’ll pay no tax on the first £125,000, then 2% on the remaining £55,000. This gives a total bill of £1,100 for stamp duty alone.
In comparison, you’ll pay more on a £300,000 property. In this case, you’ll pay nothing on the first £125,000, then 2% on the next £125,000. This totals £2,500, with a further 5% payable on the final £50,000, giving a total bill of £5,000.
Unfortunately, you can’t avoid paying stamp duty unless you buy a home for under £125,000. If the property you want to buy is slightly more than the stamp duty threshold, you could ask the seller if they’d accept a lower price to bring costs down.
To find out the impact of stamp duty on your purchase, you can use one of the many online calculators. For example, the Money Advice Service has a simple one.
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How does it impact selling your existing property?
Buyers pay out for stamp duty, not sellers. So if you’re selling your home and not buying another one, you don’t need to worry about paying this tax.
However, if your house is valued at just above £125,000, you may want to market it for slightly less to attract buyers eager to avoid stamp duty.
Read our quick fixes to help sell your property
Saga demand a Stamp Duty exemption for downsizers in retirement
Saga has written to Philip Hammond making a powerful case for the Chancellor to introduce a Stamp Duty exemption in the March 2017 Budget for those downsizing in retirement.
Research commissioned by Saga suggests this policy would release an additional 111,000 family homes on to the market. Economists at the Centre for Economic & Business Research (Cebr) estimate that the net cost of such a measure to be modest and predict the Exchequer could see a net gain in Stamp Duty revenue.
Abolishing Stamp Duty on age-related housing developments would also encourage down-sizing, add to the housing stock, and help free up housing for younger people aspiring to home ownership, Saga argues.
Saga’s Director of Communications Paul Green said: “We have compelling polling evidence that a third of over 60s want to downsize, but they are being deterred by the cost of moving.
“A simple change to Stamp Duty could remove this obstacle and relieve some of the massive pressure in the housing market. Cebr suggests the cost of this reform would be counterbalanced by an estimated extra £461 million of stamp duty generated by the higher number of house purchases this would provoke. It’s a win-win for all generations.”
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