When someone says stamp duty is 5%, they do not mean you pay 5% of the purchase price. SDLT is progressive, like income tax. You pay different rates on different portions of the price. The effective rate is the total tax divided by the purchase price.
On a £200,000 BTL, your total SDLT is £11,500. Your effective rate is £11,500 divided by £200,000, which is 5.75%. On a £500,000 BTL, your total SDLT is £40,000 and your effective rate is 8%. On a £100,000 BTL, your total SDLT is £6,250 and your effective rate is 6.25%.
The effective rate rises as the purchase price increases because more of the purchase falls into higher tax bands. This makes larger purchases disproportionately expensive on a percentage basis.
For a main home purchase, the effective rate is lower. A £200,000 main home has an effective rate of 1.25%. A £500,000 main home has an effective rate of 3.25%. The additional dwelling surcharge is the main reason BTL investors pay significantly more.
Use the effective rate when budgeting your purchase costs. The round number everyone quotes is not what you actually pay.
The formula
Effective Rate (%) = (SDLT Payable / Purchase Price) × 100
Why this matters
The effective SDLT rate is what you actually pay as a percentage of purchase price. For BTL buyers in typical South Coast price ranges, the effective rate is 6% to 9%. Budget accordingly.
If you want to know exactly what a property is worth before you make an offer, Xelox Properties can help. We run the numbers so you do not have to.