When buying a property, the largest lump sums of money you usually have to part with are the deposit and the stamp duty, so it makes sense to plan when they are payable so you can budget and make sure all of your funds are available. We explain below…
When do I have to pay the deposit on a property I am purchasing?
A buyer is obliged to pay the seller the deposit at the point of exchange of contracts, so after the conveyancing searches and survey have been completed, and when you as the buyer feel informed enough to proceed with the purchase. The buyer’s conveyancing solicitor will usually ask for the deposit a few days before the exchange and will then make the transfer electronically on your behalf once exchange of contracts has taken place.
How much is a deposit?
Some people think the deposit is the total cash funds they are using to fund a purchase outside of a mortgage, but in actual fact, a deposit for a property is usually 10% of the purchase price.
Under the Mortgage Guarantee Scheme, which runs until June 2025, creditworthy customers can get a mortgage with a 5% deposit on a residential mortgage (not second homes or buy-to-let). The mortgage guarantee scheme provides lenders with the option to purchase a government guarantee that compensates them for a portion of their losses in the event of foreclosure.
100% mortgages also exist but are rare. Saving a bigger deposit usually helps you gain access to a greater choice of mortgages which can help you select ones with lower interest rates and/or lower monthly repayments.
The deposit is a part-payment of the purchase price. If the buyer fails to complete the contract on the completion date, this part-payment can be forfeited as the minimum amount the seller can claim from the buyer for breach of contract. If the seller fails to complete, the buyer will get their deposit refunded in full.
How do I fund the deposit?
A deposit can’t be wrapped up into a mortgage, so it needs to be funded by other means. For first-time buyers, this is usually savings in cash, or a loan/gift from family. For buyers who are selling a property, they can often use the money their own buyers are paying as a deposit. If the property they are buying is more expensive, they may need to have to top this money up to get to the full 10%.
When do I pay the stamp duty?
Stamp Duty Land Tax (SDLT) is a levy that you pay to HMRC when you are buying a property. In England, how much you’ll pay depends on whether this is your first property purchase, how much you are paying for it and whether or not it is your only property. SDLT only applies to properties over £250,000 if it is the only residential property you own. You can access a free SDLT calculator here https://www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#!/intro
It is always the buyer who pays stamp duty, not the seller and usually, your conveyancer will calculate and arrange payment of your stamp duty bill on your behalf as part of the purchase process.
It is a requirement of mortgage lenders that conveyancers should hold the stamp duty funds before they use the mortgage funds to complete a property purchase. You may be charged penalties and interest if you do not file your SDLT return and make your payment within 14 days of completion.
First time buyer relief for SDLT
For anyone meeting the definition of a first-time buyer, a higher stamp duty land tax threshold applies. To qualify as a first-time buyer, you must be buying a single dwelling which you intend to be your main residence. It must also be the first dwelling that you have owned in the UK or anywhere else in the world. If you have previously been gifted or inherited a residential property or intend to use your new property as a buy-to-let investment, you will not be eligible for first-time buyer SDLT relief.
Any first-time buyer purchasing a property worth £425,000 or less will pay no SDLT at all. This limit is due to remain until in place until March 2025 when it is due to revert to £300,000. Properties worth between £425,000 and £625,000 are taxable at a SDLT rate of 5% on the proportion of the consideration above £425,000. It is worth noting that even if there is no SDLT to pay, a return must still be completed and submitted to HMRC.
SDLT on properties that are not your main residence
SDLT is payable on all properties that are not your main residence, and you usually pay 3% on top of the standard SDLT rate if you own another residential property.
Can I claim back SDLT?
You may be able to claim a stamp duty refund if you sell your main home within three years of completing on a new home. The refund is the 3% surcharge for owning two or more properties. To claim a refund.
You will need to apply via this link https://www.gov.uk/government/publications/stamp-duty-land-tax-apply-for-a-repayment-of-the-higher-rates-for-additional-properties with a copy of the Stamp Duty land Tax Certificate 5 which has the reference number for the original payment. The conveyancer who acted at the time of the purchase can provide a copy of this to you.
For further information or legal advice, please contact our Residential Property team.