Stamp duty is a tax charged by the government when you buy property or shares. There are different kinds of stamp duty, which apply to different purchases.

Stamp duty on homes and land

Stamp duty land tax (SDLT) is charged on the purchase of houses, flats and other land and buildings. The tax, often referred to simply as stamp duty, has existed in various forms since the 1690s.

How much you will pay

The tax is currently graded into six bands and represents a percentage of a property’s purchase price. On properties costing up to £125,000 there is currently no duty to pay. After that there are five stamp duty tiers:

• £125,000 – £250,000 = 1%

• £250,001 – £500,000 = 3%

• £500,001 – £1m = 4%

• £1m – £2m = 5%

• More than £2m = 7%

Your stamp duty bill is calculated on what is known as a “slab structure” rather than being charged on a sliding scale – this means if your property costs between £250,001 and £500,000 you pay 3% of the entire value, not just 3% on the portion that goes over the £250,000 threshold. This is unlike income tax, where you pay a different tax rate on different portions of your earnings.

This can make for huge jumps in the tax charged if you only pay a little more for a property. For example, if you pay £250,000 for your home, your stamp duty bill will be £2,500. However, if you pay £250,001 you jump to the 3% band and your tax bill trebles to £7,500.03.

Minimising your bill

Rather than buying somewhere for a price just over one of the thresholds and facing a large bill, it might seem like a good idea to agree a lower purchase price and a separate price for items such as the carpets and curtains. However, the forms you need to fill in now contain questions designed to weed out instances where a property price has been kept artificially low.

Paying the tax

SDLT is a self-assessed tax, so it is the responsibility of the individual buyer to ensure that they have accurately calculated and paid their liability. The return can be filled in online or on paper. In reality, most of this will be carried out as part of the duties of the buyer’s solicitor. The tax must be paid within 30 days of the effective date of the transaction, which in most circumstances is the date of completion on the property. Once the Land Registry has received a certificate from HMRC that the duty has been paid, it will register the new ownership of the property.

Stamp duty on shares

Stamp duty is also payable on shares. If you buy them through a stockbroker the transaction is usually “paperless” and carried out via the electronic settlement and registration system, known as Crest. For these transactions you would pay a stamp duty reserve tax (SDRT).

If you buy stocks and shares for £1,000 or less, you don’t normally need to pay any stamp duty at all – or even tell HMRC about the transaction. SDRT is charged at a flat rate of 0.5% of the amount you pay for your shares, and is rounded up to the nearest penny. Your stockbroker will take care of paying the tax, and will subsequently bill you.

If you invest in a unit trust or an open-ended investment company (Oeic), the fund managers pay the SDRT. This is taken into account when the unit price is set. Chapter 15 of the Stamp Taxes Manual offers more detailed information.

If you use paper stock transfer forms for buying shares you will pay plain stamp duty, not SDRT. This is also charged at 0.5%, but is rounded up to the nearest £5. You are responsible for paying stamp duty to the HMRC directly.

Aim shares

Shares listed on the Alternative Investment Market (Aim) do not attract stamp duty when you purchase them. This is designed to encourage investment in small and growing businesses. These are, however, riskier shares than those listed on the main FTSE indices, so will only be part of experienced investors’ portfolios.