Stamp duty change set to boost house prices, experts say

08 December 2014

Estate agents believe redesign will benefit existing owners more than buyers amid rush to push through sales of £2m

A surprise change to the stamp duty system is likely to provide a fresh boost to the housing market and lead to higher prices for homes where the tax will be cut, property experts have warned.

George Osborne’s unexpected announcement on the home-buying tax meant estate agents were on Wednesday scrambling to complete deals on properties at the top end of the market, where buyers now face far bigger costs designed to help offset an £800m reduction in bills on lower-priced homes.

One agent in south-west London said he was rushing through an exchange of contracts on a £2m home to save the buyer almost £54,000 in duty, while another elsewhere in the capital pushed through a £3.9m sale to save £110,000.

The change takes effect at midnight, leaving agents and solicitors just hours to carry out the transactions.

While anyone paying up to £937,000 for a home will face lower stamp duty under the reformed system, economists have suggested the move could cause further house price rises.

The chancellor has ended the “slab structure” for stamp duty land tax and replaced it with a progressive regime. Under the old system, which netted the Treasury £6.45bn last year, the entire cost of a property was taxed according to the highest band it fell into; there were sharp increases at each threshold. The “cliff edge” was particularly unpopular at the level of £250,000, where a rate of 3% kicked in, which meant that while a home costing £249,000 attracted duty of just £2,490, anyone spending £251,000 faced a tax bill of £7,530.

The new system, which is structured in the same way as income tax, will mean there are no big leaps in duty and house sales will no longer cluster just under each of the thresholds.

In a move he said would benefit 98% of home buyers and save £4,500 on the average house price of £275,000, Osborne added new thresholds and rates above the £125,000 level at which the tax bites.

Now home buyers will pay 2% duty on any costs from £125,001 to £250,0001, a rate of 5% on any portion between £250,001 and £925,000, 10% on the next chunk up to £1.5m, and 12% on any cost above that. In a strange quirk, buyers paying between £1m and £1.1m on a home will also be better off after the change.

The chancellor told MPs: “In recent years the burden of stamp duty has increased on low- and middle-income families trying to buy a new home, as prices have risen. This makes it even more difficult to get together the cash deposits buyers need. It’s time we fundamentally changed this badly designed tax on aspiration.”

Property experts welcomed the change, which they had been wanting for years, and said it would remove some of the distortions of the market.

Brian Murphy, head of lending at the Mortgage Advice Bureau, said the change gave “home buyers a long overdue break”. He added: “In a climate where many potential first-time buyers struggle to raise enough money for a deposit and second-steppers still have low equity in their existing homes, the fact that 98% of people will pay less in stamp duty should encourage more movement and take a load off buyers’ minds.”

However, it was thought the lower duty might eventually mean higher prices. Matthew Pointon, property economist at Capital Economics, said the move from a slab system was sensible but offered no lasting benefit to first-time buyers. “As with all property taxes, [these] changes are likely to be quickly reflected in house prices.”

He added: “While the change will help first-time buyers access the market by reducing upfront costs, in the long-term they’ll be no better off. Rather, it will be existing owners who benefit. Given that, a cynic might argue that the chancellor was trying to engineer a mini-house price boom just before a general election.”

Emran Mian, director of the Social Market Foundation, said lower transaction costs could drive a new round of house price rises other than at the top end of the market. “It could be an odd dynamic – London house prices at top of the market fall, everything else rises, hitting affordability for the average buyer.”

Stephen Ludlow, chair of the estate agents Ludlowthompson, said the change would also be a boost to buy-to-let landlords, who usually invested in the kind of properties that will benefit from the announcement. “The changes in stamp duty will see the biggest increase in net returns for more modest investments – smaller properties in zone three of London, city centre apartments, flats above shops, ex-local authority property and property in secondary locations,” he said.

The surprise announcement led to a flurry of activity for estate agents selling homes costing more than £937,000 as buyers were told that if they exchanged before midnight they could elect to use the old system and pay less tax.

One agency, Kinleigh Folkard & Hayward, said it had several buyers trying to put through sales. One, at its west Putney branch, involved a £2m property which faced a bill of £153,750 under the new regime compared with £100,000 previously. Tim Beattie, sales manager at the branch, said the change had taken everyone by surprise. “We were looking to exchange at the end of the week or early next week – you couldn’t have done this from a standing start. It is such a lot of money. It has focused the minds of everyone involved.”

Osborne’s reforms appear more generous than those already set to be introduced in Scotland in April. Under the Scottish government’s changes, the first £135,000 of a purchase will be tax free, but a 10% rate kicks in at £250,000.

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