Published: 09/07/2020 By Musgrove & Co

Stamp Duty 

Chancellor Rishi Sunak has confirmed a major stamp duty cut in the bid to boost the housing market.

Speaking on the Summer Economic Update, Sunak revealed plans to raise the duty limit in England and Northern Ireland. It will go from £125,000 to £500,000.The leave will begin immediately and will run until 31st March 2021. This means that about 9 out of 10 transactions will no longer be subject to it.

Meanwhile, the average duty bill will fall by £4,500. In London and the South East, home to more expensive properties, buyers could save up to £14,999 overnight.

Richard Donnell, Zoopla's Director of Research and Insight, said: "An immediate increase in the limit will help sustain the rebound in housing market activity across England.

"The government will expect changes to encourage more housing sales in the second half of the year and the savings made by buyers will be recouped in home improvements, white goods and furniture rather than increased housing costs".

Stamp Duty Holiday - How can it affect you?

What is Stamp Duty?

Buyers pay stamp duty when purchasing a house or piece valued at £125,000 or more in England and Northern Ireland. It is charged on a basis. This means you only pay higher rates on slices above any threshold, which is similar to income tax.

However, discounts are available to first-time buyers. They won't have to pay it on the first £300,000, as long as the house costs more than £500,000. Meanwhile, people who purchase additional property, such as second homes, pay 3% of the additional fee.

It is worth noting that this is different if the property or land is in Scotland or Wales.

How will it work?

Sunak suggested buyers will only start paying duty on properties above £500,000. This will apply whether people are buying their first home, or moving up or down the housing ladder.

The 3% surcharge will apply on top of the revised standard rates during the holiday. This means those purchasing additional homes will draw a 3% stamp duty bill on the first £500,000 of the property. This would still result in a savings. The 3% rate was previously applied to £125,000, with a higher rate above that.

Why has the Chancellor introduced the remedy?

Since April, there have been several calls for a holiday. This was a result of people recognising the help needed to revive the housing market as lockdown eased.

Physical restrictions during lockdown have had a considerable impact on the market. This was evident in the latest Zoopla House Price Index and Rental Market Reports.Our calculations in April showed that housing transactions could be reduced by 50% this year. This means that receipts could be around £4bn, assuming home prices do not change. Estimates were far higher than that before lockdown.

The theory is that an effective tax break will encourage potential buyers to move home.

How long will it last?

The 'holiday aspect' means that there is an impetus to work because it is not a permanent change.

There is an argument that this only brings forward activity that would have happened anyway. But when it is an attempt to speed up the economy, it seems acceptable.

The indication is that it can boost sales activity to boost the entire economy. House prices can vary across countries. However, if part of the market starts to seize, it affects other parts of the market and the broader economy.

The cost will be significant. But, given the current circumstances, this is a modest figure in comparison to the cost of running the furlough scheme. It was reported that it cost the government £39 billion for the three months the furlough scheme was running.

How will it affect the economy as a whole?

Ultimately, the relief is unlikely to be lost. Instead, it can boost the economy as buyers redirect those funds to spend. It is not only about helping people achieve their goals in terms of housing. It is also about how important the housing market is to the entire economy.

When you move into a new home, you need to organise your finances and utilities. You may also need  other services in the work of moving. You may want to refinish, buy additional accessories or do something with the garden. All of this supports the retail sector. The impact of this 'network' on the economy means that the government wants to encourage housing mobility.

Donnell said: "The government would hope that savings feed into additional expenses in the real economy, as more cash is spent on home improvements and white goods, rather than enabling buyers to spend more on their next home".

Who will benefit from it?

It is welcome news for buyers, estate agents and developers. The coronavirus crisis rocked the entire housing market.

Sunak’s move will mean major savings for some buyers, especially at the lower end of the housing market. But others will not see any change. For example, first-time buyers buying homes in England or Northern Ireland up to £300,000 have been exempted from this property tax since 2017. This helped nearly 214,000 buyers buy homes in 2018/19.

Does the area of the country I live in matter?

Stamp duty may be payable on 85% of all property transactions (except for first-time buyer rebate). But from a geographical point of view, the effect of the tax is not uniform across the country. The reason for this is the wide range in average house prices. Stamp duty receipt data evidences this. It shows that buyers in London and the South East paid 72% of all receipts in 2018/19.

The reasons for this becomes clear when you look at the stamp duty charge for average property prices in UK areas.

In other words, the average price of a property in London exceeds the lowest interest-free range for the region.
This is further reflected in the revenue received by each sector.

In London, the South East and the Midlands, the proportion of sales where this tax was not payable was less than 5%.Parts of the north of England experienced more than 40% of sales that were not liable for it.

In short, it will largely be home movers in London, the South East and parts of the Midlands who will benefit the most from the leave.

In fact, our data shows that the biggest beneficiaries of holidays are the affordable areas in and around London This is where up to 95% of sales stamps will be duty-free.

Have there been stamp duty holidays in the past, and have they worked?

There have been holidays in the past and they have sometimes worked.

It was introduced during the recession in late 1991 to 1992 was when the housing market declined. At that time the rate was just 1%. They temporarily increased the limit from £30,000 to £250,000. The average price of a house was over £50,000.

Despite this intervention, housing transactions in 1992 were still lower than in 1991 and house prices still fell. But the possibility is that without the leave the figures would have been much worse.

The government introduced another holiday during the financial crisis of 2008 to 2009. The holiday raised the lowest limit on the 1% rate of stamp duty from £125,000 to £175,000. The rates for the more expensive properties were 3% and 4%. The average price of a house at this point was less than £175,000. Transaction levels fell to 5% in 2009, but this came after a 3% increase in activity in 2010 after a 44% drop in 2008.

However, we can attribute some of this to price adjustments and the start of the green shoot in the economy.

What else should I know about stamp duty regimes?

The government introduced historical reforms for the duty in 2014. It saw a way to calculate the tax change as well as the rates. Scotland followed up with the change in 2015. It effectively cut the tax bill on homes to £940,000 (which accounts for more than 95% of homes) but cranked up the charges for more expensive properties.

In 2009, the most expensive band was 4%. It is now 12%, 15% for some buyers, and 17% for overseas buyers purchasing in England from next year.