Tag Archives: personal tax

Stamp duty, any logic?

As with most people moaning about stamp duty, yes, we have just moved house.  I am therefore inevitably a little biased against it as it’s just stung me for a lot of money.

But…trying to be logical about it, where is the fairness in stamp duty?

It doesn’t tax wealth, it taxes movement and geography

Some would say it taxes you lots only if you buy a really expensive home.  Whilst kind of true, problem is, it doesn’t really tax wealth, how much you suffer in your lifetime is significantly impacted by how often you move and where you live.  Eg simple example, two scenarios (ignoring inflation):

Person 1 – is loaded and lives in a cheap part of Britain.  They get a 9 bed mansion with acres of land for just under £1m, paying £40k stamp duty.  They keep this property for 20 years.  Total stamp duty paid over 20 year period living in a 9 bed mansion = £40k.

9 bed cheap area
9 bed mansion with acres in cheap area

Person 2 – has a growing family and lives in a more expensive part of the UK, like London.  Year 1 they get a studio apartment, cost £200k, stamp duty 1% = £2k.  Year 4 they upgrade to a 1 bed flat, cost £400k, stamp duty 3% = £12k.  Year 8 they want modest outside space for the toddler(s) to run around so go for a 2 bed terrace, cost £600k, stamp duty 4% = £24k.  Year 12 they need somewhere a bit bigger, a 3 bed semi at £800k, stamp duty £32k.  Year 16 they’ve got teenagers so need more space still, hence buy a 4 bed detached at just under £1m, stamp duty 4% = £40k.  Total stamp duty paid over 20 year period living in 5 different properties ranging from studio flat to 4 bed detached = £110k.

4 bed expensive area
4 bed modest home in expensive area

So person 2 paid almost three times as much stamp duty to end up living in a 4 bed house than person 1 paid to live in a 9 bed mansion.

Where’s the logic/fairness in that?

What if person 2 lived in a cheaper part of the UK?

If person 2 happened to live in a much cheaper part of the UK, where lets say house prices are a quarter what they are above, would the stamp duty bill be quarter too, ie £27.5k?  Logic would presumably say yes, that would be fair.  Reality is it’d be way less.  (0% of £50k) + (0% of £100k) + (1% of £150k) + (1% of £200k) + (1% of £250k) = £6k.  Of course if they were more like person 1 and bought the most expensive property at the beginning then didn’t move again, they’d pay just £2.5k stamp duty to end in the same house.

Where is the logic/fairness in that?


If you add inflation into the equation it gets even worse, as barring occasional brief blips, every time you move house prices will be that much higher, hence stamp duty increasing significantly (as the bands have not historically increased in line with house prices).  Therefore the person who bought the expensive place ages ago is in an even better position relative to the person who keeps moving at ever increasing house prices.

Ok, let’s look at specific demographics – the elderly?

What about the other end of someone’s life?  One problem we hear a lot is that there aren’t enough family homes.  The road I spent my later childhood years on has 12 houses, all 4-5 bed detached.  Whilst a handful of these now have families in, most now have couples/widows aged 60-90.  Their kids left home years ago (like I did), but the parents stayed put.  Why don’t they downsize to somewhere smaller, freeing up the house to a new family?

Well…what’s the incentive to them?  They could perhaps reduce their council tax bill by a modest sum, but if they wanted to move to a nice 2 bed flat with lift near the town centre to make life easier in their old age, they’re going to be paying >£250k for it, hence HMRC will reward them for freeing up their family home with a stamp duty bill of £8+k.  So whilst they would likely get some cash from the released equity, the taxman would sting them for freeing up their home to a more appropriate demographic.  Hardly an incentive.  It’s therefore understandable why they often make the choice to stay put hogging the big houses.

Property developers?

What about property developers?  Surely they do a good service to the British housing stock, buying run down properties, spending money to improve them and make them fit for modern families.  One by one they turn dumps into lovely homes.  Reality is they’ll only do it if there’s a profit in it for them…and if 3+% of the property price is going to go on stamp duty, they’ll need to do make a big profit based on their work to compensate for that.  This will likely put off a lot of people, as before they consider spend on refurbishment they need to sell for ~£10k more than they buy simply to break even.

Buy to let landlords?

What about buy to let landlords?  They get off pretty well.  Most will buy the smaller units as they’re typically easier to let.  So they buy quite a few places at 0-1% stamp duty, and hold them forever.  Total stamp duty haul = negligible.  Compare that to first time buyers who might own it for perhaps 5 years before moving up the ladder.

International speculators?

There’s been a few programmes recently about rich foreigners buying prime London property then leaving the place to sit empty.  It’s taking potential homes out of circulation, leaving it empty.  They sit on it for years as a “safe place” for their money, in the hope of future property price increases.  They’ll probably pay stamp duty on the purchase (some would say they’ll use complex overseas avoidance schemes to greatly reduce the bill, outside the scope of this blog), but again, if it’s not re-sold for some time, the long term stamp duty haul isn’t that great, so these people don’t really get stung either.

Other stamp duty issues?

Stamp duty also causes grief due to the unique “slab” way taxes are calculated.  Buy a property at £250,000 and you pay £2,500 stamp duty.  Buy a property at £250,001 and you pay £7,500.03 stamp duty.  An extra pound in sales price and the stamp duty triples.  This means there are certain price points where it’s very tricky to sell a house, most notably the bracket immediately above £250k.  It’s never a good thing where taxes skew the market like this.

Compare this to income tax, where when you breach a personal tax band (eg going from basic to higher rate tax) you only pay the higher % on the bit in the higher band, not suddenly on everything.

Also, as mentioned above, the bands simply haven’t kept pace with house price inflation.  Geeky name for this is fiscal drag, it often applies to earnings too where wage inflation dwarfs increases in tax bands.  The problem with this is that when stamp duty was introduced, it was only intended to hit those buying the most expensive properties.  Now, there are many parts of the UK where even the cheapest of homes will suffer some stamp duty.

Why don’t people move to cheaper areas?

I wondered this myself.  With internet connections always improving, why don’t some average earning individuals who work from home move from expensive areas to cheaper areas.  Their income could potentially be largely unchanged (as they work remotely anyway), yet property prices greatly reduced.  They could sell the 1 bed flat in London and buy a 4 bed house in Wales.

You might expect this to help even out house prices, supply and demand would mean people moving to the cheaper areas so prices even out.

Reality is this doesn’t seem to be happening, as differences between house prices between regions seems to be going up rather than down.  Why?  I don’t know.  I guess reality is partly that many people can’t work remotely and wages are higher in London/South East, but also that people would be leaving behind friends and family if they moved away.  Many would rather live in a more modest home where they know and like than risk going somewhere new.


So where does this leave us?  If you live in an area where house prices are relatively low and don’t move much, it’s not much of a problem.  However, in the higher priced areas it’s a major concern.  It doesn’t stop people owning expensive properties, it stops them moving between properties.

  • Workers are stung if they have to move around a bit
  • Growing families are stung if they try to move to a bigger place
  • Retirees are stung if they try to move to a smaller place
  • People trying to regularly improve run down properties are stung
  • Meanwhile rich land barons sitting on/accumulating property don’t suffer at all

Stamp duty encourages the clogging up of the housing market.  It makes people lean towards sticking where they are, regardless of whether their circumstances change and another property might be more suitable.  Downsizing is discouraged, making it harder for people who need more space to upsize.  How is any of this good for the country?

What possible solutions are there?

With some of my comments above being centred around the unfairness due to geography, some would argue that stamp duty bands should be regional rather than national.  Eg in rural Wales/North England, the bands could start at (say) £75k for 1%, £150k for 3%, whilst in London it might be (say) £300k for 1%, £600k for 3%.  This would potentially then mean regardless of where you are geographically, the cheapest 1 bed flats could be stamp duty free, modest family home 1%, nice family home 3%.

I personally don’t like this idea at all.  Why?  Because whilst the above sounds very fair and simple, it gets difficult when you look at borderline cases.  You’d end up with a situation where one end of a road pays a higher % stamp duty for the same price house as another end of a road.  You need to draw the boundary somewhere, and that’s going to skew results at those boundaries (same way nobody pays £251k for a house now).

Potentially it could be worked out on some precise average house price per post code area calculation.  Problem with this is you often wouldn’t know how much stamp duty you’d pay until detailed calculations had been done.  Not very helpful for significant costs to be unknown when planning a purchase.

Anyone who knows me will know I think simplicity should always be a key focus of tax rules, and this would not be simple.

Ok then Chris, what would you do?

If I was chancellor, I’d simply abolish stamp duty altogether, probably staggered over multiple years.  Sure, this will reduce income to the treasury which will need to be clawed back elsewhere, in which case if it’s agreed it should be based upon property, then do it via council tax, or the Lib Dem’s proposed “mansion tax”.  Don’t tax property movement, if you want to tax property, tax the ownership of it.

What do you think?

FreeAgent user – how much dividend can/should I take?

It’s a question we get asked a lot. There’s two important and completely separate considerations you should have when considering paying a dividend.

1) Can my company afford it?

2) Is it a good idea from a personal tax perspective?

Company retained profit

Let’s take the company side first. Dividends can only be paid out of retained profit. This means what’s left after you’ve set aside enough to pay all the company’s liabilities, including tax bills even if the due date is some time off.

Fortunately, FreeAgent does all the hard work for you, summarising it all into one number. Bizarrely they choose to hide this number in the very bottom right of the overview page, but it’s there as “Carried forward/distributable“.

Carried forward profitSee the example above for a business in a fairly healthy position. What this figure represents is what you’d hypothetically have left if you ceased trading today, collected in all debts owed to the company, and paid off any debts owed by the company. This is why it’s the absolute maximum dividend you can take, as otherwise you’d be leaving the company in a position where it can’t afford to pay its debts (ie you’d be defrauding the creditors).

If this number is negative, you can’t take a dividend at all. Your company is already insolvent, meaning it owes more to others than the value of its assets (ie negative equity).  Taking a dividend anyway in this situation is technically illegal.

Inevitably as with anything, the data FreeAgent throws out is only as accurate as the data put into it…so make sure FreeAgent is up to date and that things like the bank balance in the software agrees to what’s _actually_ in the bank before making any significant decisions.

Also (stating the obvious) always clearing this figure down to £nil isn’t a great idea. Good to leave a nice buffer there in case things take a turn for the worse.

Your personal tax situation

Completely separate to the above, the question comes in over whether it’s tax efficient to take a further dividend at this point.

What other earnings have you had in the tax year to date? Dividends suffer 7.5% (barring first £2k for 6 Apr 2018 onwards) whilst a basic rate taxpayer. As a higher rate taxpayer they’ll suffer 32.5% personal tax. If you get above £100k total income, then the effective rate is higher still.

The key time for this is 5th/6th April. It makes no difference whatsoever what your company year end is. The personal tax you pay on dividends revolves around the personal tax year, 5th April.

Therefore especially this time of year (mid March at time of writing), if you’re thinking about taking a big dividend, it’s worth giving it a bit of thought. Does it make sense to take that dividend quickly now, or is it beneficial to hold fire until 6th April if you can?

Delaying until post 6th April will always delay the personal tax…but if it only delays it, is it worth it? Also, if you’ve only earned (say) £20k this tax year, and expect to earn (say) £60k next tax year, it definitely makes sense to rush through that dividend now. Nearly always better to pay a small amount of tax soon rather than a much larger amount later.

If you’ve been using FreeAgent for a while, you can easily see your relevant figures for the current tax year from the “My money” tab.

Top tip – you can also go to the “Taxes” –> “Self assessment” tab, click the current tax year and have a look at what the liability currently shows as. Then click “Edit details” in the top right, stick in a figure you’re thinking about taking in the “Dividends” box then “Save changes”. See what your liability is now. This gives you an easy way to get a good idea of what extra personal tax you’ll have to pay if you take that extra dividend. NB ensure you then delete this hypothetical dividend figure!

Dividends experimentAgain, the data FreeAgent chucks out is only as good as data that’s been entered…so check it’s correct before making significant decisions. Also be aware as things stand FreeAgent won’t account for student loan repayments, so that may be a hefty additional amount to pay over and above the figure FreeAgent quotes. It also doesn’t currently account for payments on account (EDIT – I gather this has just been changed, March 2014). However, I anticipate both these things will change in the fairly near future.

For Maslins clients we tend to have a look at their personal tax position in February/March to advise. It’s generally a quiet time for us (after January tax return rush) and it’s the time you most want to be thinking about this…as simply waiting a day can potentially have a massive impact.

The boring legals

You should produce the board minutes and dividend voucher for each dividend.  Once you’ve paid the dividend, uploaded the bank transaction to FreeAgent, and explained it, you can then easily get templates for these from “My money” –> “Dividends”.  Strictly speaking you should print these out, sign and date, then file away somewhere safe.