What have the new stamp duty rules done for house prices?
The way stamp duty is charged on property has been radically overhauled. The hugely unpopular 'slab system' that previously saw buyers of £250,000 homes fork out £2,500 in tax but buyers of those priced just £1 more whacked with a £7,500 bill is now, thankfully, a thing of the past.
The old system was regressive in that a lower value property within one price band paid the same proportion of the value in tax as properties in higher tax bands. This distorted the market because a situation arose whereby houses never went on sale at prices on or close to the thresholds at which the rate changed. They either went on sale just below the threshold, meaning some were undervalued, or they went on significantly above meaning some were overvalued.
Sellers understood that no buyer in their right mind would pay a penny over the price at which a lower tax rate applied because it would cost them dear. Taking the £250,000 threshold (that used to separate properties into the 1% or 3% of sale price tax liability) as an example, there was often a broad range of homes on the market priced between £240,000 and £250,000.
But very little, if anything, was marketed between £250,001 and £260,000 because of the £5,000 penalty that kicked in at the £250,001 price point. The same 'dead zones' existed around the other thresholds of £500,000, £1 milllion and £2 million.
In place of the old slab regime stands a shiny new 'progressive' system. It works a bit like income tax. There's nothing to pay on the first £125,000 of a property's value (like the old system) and charges are then levied on an ascending scale as the price rises.
A 2% charge applies to the portion of the value between £125,000 and £250,000, while a 5% fee comes into play on the portion above £250,000 up to a ceiling of £925,000. From then on, the tax rates increase considerably. The value portion between £925,001 and £1.5 million results in an additional 10% bill, and anything above £1.5 million adds another 12% charge.
The old stamp duty system (% charged on total sale price)
- Up to £125,000: 0%
- £125,001 to £250,000: 1%
- £250,001 to £500,000: 3%
- £500,001 to £1m: 4%
- £1 million to £2 million: 5%
- > £2 million: 7%
The new rates (% charged on portion of value)
- Up to £125,000: 0%
- £125,001 to £250,000: 2%
- £250,001 to £925,000: 5%
- £925,001 to £1.5 million: 10%
- >£1.5 million: 12%
The numbers explained
If all those numbers are starting to make your head spin, here are some examples of what you could pay.
At the time of writing, the average UK house price was £188,559, according to the Nationwide house price index. So a buyer would be liable to pay stamp duty on £63,559 (£188,559 minus the £125,000 exemption). For properties worth anything between £125,001 and £250,000, stamp duty is charged at 2%. So a buyer would face a stamp duty bill of £1,271.18 (2% of £63,559), which is a saving of around £600 compared to the old stamp duty bill of £1,885.59.
Moving up the price bands, the average price in Brighton and Hove was £394,755 at the time of writing, so a buyer would be liable to pay £9,737.75 – and that's a substantial saving of around £2,100 on the £11,842.65 stamp duty would have cost under the old system.
The Chancellor said 98% of homes paying stamp duty will be better off under the new system, which will result in a tax cut of as much as £4,500 when buying a family home costing £275,000. As Moneywise went to press, this was about the average house price in Bath, Bristol, Bournemouth, Milton Keynes and West Sussex.
In fact, anyone buying a home costing between £125,000 and £937,500 is better off under the new system.
Robert Gardner, Nationwide's chief economist, explains: "Based on 2013/14 transactions data from the Land Registry, nearly 590,000 purchasers in England and Wales would benefit under the new regime, with an average benefit of circa £1,600.
“The benefits will be greatest in the South of England where average house prices are higher. We estimate that around 85% of transactions in London, the South West and South East would benefit from the changes, compared with around 50% in the North, Yorkshire and Humberside, and the North West of England."
And as a result of the new regime, properties are starting to creep on to the market in the former 'dead zones'. For example, as Moneywise went to press, a three-bedroom detached home in the Thornhill area of Cardiff was newly listed on the Zoopla property portal
at £250,250. And a similar property in Halifax was on at 'offers over' £250,000 on the Hunters estate agent website.
Miles Shipside, Rightmove director and housing market analyst, says: "Following changes in stamp duty in the Autumn Statement, property hunters can still find bargains. For years, sellers have had to price at £125,000, £250,000 or £500,000 even if the property would have been worth up to 10% more in a market that wasn't distorted by the stamp duty thresholds.
"Many properties are still priced below these thresholds even though their significance has been greatly reduced now that the additional tax is incremental rather than a 'slab', and some of them now offer tempting value if you can get in quick."
He added: "No newly marketed property has a reason to price down to such an extent as before, so this is a limited opportunity and serious buyers around these brackets should be scouring the market for this older stock."
Will you be better off?
Joe Sarling, an economist and senior analyst at the National Housing Federation, says the Chancellor's new stance on stamp duty is a most clever policy "because it makes existing homeowners (often voters) better off, while making new buyers 'feel' like they will be better off". But he warns that in reality, analysis by the federation of Office for Budget Responsibility (OBR) data shows it will push up house prices "in the majority of places in England".
He explains: "A buyer will pay what they can afford in order to buy a house. They have factored in the fees, stamp duty and price already and know the maximum they can afford. If stamp duty is removed, they can still afford to pay the same amount as before and will offer to pay this.
“Indeed, the seller will also know that the buyer isn't going to pay such high tax rates and will ask for more money. In fact, the extra money will increase competition among buyers and will push up prices. The net effect is that the Treasury gets less money and the original seller will get more."
And when the seller becomes the buyer on the purchase of their own new home, they'll have more money, too, and will most likely use it to pay a bit extra for their new property. And so it continues, he adds.
In the vast majority of places, the overall 'multiplier' effect (the stamp duty saving plus the impact of buyers having more money to spend) is that house prices will increase over time. The OBR has forecast that a 1% reduction in stamp duty will translate into
a 1.4% rise in house prices.
Sarling's analysis reveals in just under 300 local authorities the average home will become more expensive with the largest changes forecast for Chiltern, Warwick and Cheltenham with increases of just under £2,500. In 74 of the local authorities, there is expected to be an average house increase of more than £1,000.
However, since the introduction of the new stamp duty rules there has been no immediate uptick in house prices. In December, annual house price growth slowed for the fourth month in a row to 7.2% from 8.5% in November, according to the Nationwide house price index - taking the average UK price to £188,559, down 0.2% from £189,388 a month earlier. However, member agents of the National Association of Estate Agents recorded the highest level of registered home buyers per branch in December for 10 years and a rise in the number of properties sold in the bands of up to £250,000, and £251,000 to £925,000.
It's all change again in Scotland come April
From 1 April 2015, Scotland will implement its own version of stamp duty, called the land and buildings transaction tax (LBTT). Like the new stamp duty system in place across England,Wales and Northern Ireland – and Scotland – it is a progressive system that charges homeowners proportionately more the higher the price of their property.
The first two rungs of the Scottish scheme are more generous than elsewhere in the UK. As for the first rung, there's no tax to pay on the first £135,000 of a property's value, compared to the less generous £125,000 under the UK system.
This means that within the second rung (the 2% Scottish band between £135,001 and £250,000), a Scottish buyer of a £250,000 home would face a tax bill of just under £2,300, while their neighbours south of the border pay just under £2,500.
|PROPERTY PRICE||LBTT RATE|
|Up to £135,000||Nil|
|£135,001 - £250,000||2%|
|£250,001 - £1,000,000||10%|
So far, so good. But it all becomes very different when the third rung kicks in – 10% between £250,001 and £1 million) and double the 5% that will apply between 250,001 and £925,000 in England, Wales and Northern Ireland.
The fourth and final rung of the Scottish system is more costly, too. Its top rate of 12%, while the same as over the border, kicks in sooner, at £1 million compared to £1.5 million.
"As of 1 April 2015, a £500,000 farmhouse in North Northumberland will cost a buyer £15,000 in stamp duty, whereas the exact same house a few miles away in Berwickshire will cost a buyer £27,300 in Scottish tax," explains John Coleman, head of farms and estate agency for the Edinburgh office of estate agency Smiths Gore.
"So the buyer would have to pay an extra £12,300 just for the privilege of living in Scotland. I can't see that being a tempting selling point for investing in Scotland.The Scottish government needs to make Scotland more attractive to inward investors, not less so."
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Office for Budget Responsibility
Formed in May 2010, the OBR makes an independent assessment of the public finances and the economy, the public sector balance sheet and the long-term sustainability of the public finances. The OBR has four man priorities: to produce two forecasts a year for the economy and public finances, to judge the progress the government has made towards meetings its fiscal targets, to assess the long-term sustainability of the public finances and to scrutinise the Treasury’s costing of Budget measures.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.