Austerity has been with us since 2010 and George Osborne hoped to balance the books by 2016.
That is getting very close now and while many of the easiest cuts have already been made, the public finances are still in very poor shape. It is not that spending has been increasing, but rather that revenues, particularly income tax, have been weaker than expected. In order to get things back on track the UK will be faced with more austerity, and also the possibility of more tax to pay if the economic recovery does not feed into profits and wages – and hence healthier tax revenues – pretty fast.
In such an environment it was surprising that he chose to overhaul the system of stamp duty land tax in England and Wales to make most buyers pay less tax than before. The speed of the imposition of the new system was also a surprise. Scotland has already announced its proposed new system, the land and buildings transactions tax, but there is a long lead time. The Scottish system does not come into force until April, but Mr Osborne gave less than 12 hours’ notice that his new system would be imposed.
Under Scotland’s land and buildings transactions tax, no tax will be charged on properties priced up to £135,000; 2 per cent will be charged on properties between £135,000 and £250,000; 10 per cent will be charged for properties costing between £250,000 and £1m; and for properties costing more than £1m, the levy will be 12 per cent.
Under the new rules for England and Wales, the first £125,000 of a property will not be taxed at all, while buyers of properties valued from £125,000 to £250,000 will be charged at a 2 per cent rate. From £250,000 to £925,000, buyers will be charged at 5 per cent. From £925,000 to £1.5m, they will be charged 10 per cent and for more than £1.5m the rate will be 12 per cent.
Importantly between now and April, buyers in Scotland will be subject to the system in England and Wales, which means that those homes in Scotland in the highest house price brackets will see two increases in the tax. That will cause some distortion to activity in Scotland as transactions will be brought forward in order to avoid the higher Scottish tax from April.
There are differences in timing and thresholds, but both systems have taken the revolutionary step of abolishing the slab system. The new rates in both systems are only paid on the value of the property within the threshold ranges. So under the England and Wales system, a property valued at £200,000 only pays stamp duty on £75,000 (£200,000 to £125,000) at 2 per cent rather than on the whole £200,000 that would have been the case under the old regime. The new rates mean that buying a home up to £937,500 or between £1m and 1.12m will incur a smaller tax bill meaning that 72 per cent of buyers will pay less stamp duty and only 2 per cent will pay more. The remaining 26 per cent will see no difference under the new regime.
Regionally the change in stamp duty land tax rules has different effects. Higher house prices in London and the south east means that these regions see the largest proportions of buyers that are worse off under the new system. But these are also the regions where there is a larger proportion of buyers who would be better off too. That reflects the huge range of house prices in these regions – the average London house price is now £461,500, but the average price in London boroughs ranges from £1.3 million in Kensington and Chelsea to £265,000 in Barking and Dagenham. In Dagenham the stamp duty land tax payable falls by more than half under the new system, from about £7,800 to just £3,000. In contrast in Kensington and Chelsea the stamp duty land tax payable rises from £65,000 to £73,750.
For those saving on their stamp duty land tax bill, on average the saving is approximately 0.6 per cent of the average property price. This will give buyers more to spend and make it a little easier to pass mortgage affordability tests. Both of these should boost transactions and prices, but this will only be a temporary effect. As new demand boosts prices, this will erode the additional benefit of the reduction in stamp duty land tax.
For those worse off, the loss is equivalent to about 2 per cent of the purchase price. The additional cost of the duty adds to the overall cost of moving house, which affects the overall affordability above about £1m. This will put some downward pressure on prices in this bracket and cause a pause in the number of transactions as buyers and sellers assess the impact of the change.
Overall it is a good move to get rid of the slab structure, although abolishing it altogether would be even more efficient. Transactions are the most important indicator of a healthy housing market and ease of moving is also essential for labour market efficiency so reducing the financial hurdles is a very welcome move.
The availability of credit is a crucial factor for performance and transactions, despite any additional cash freed up by a lower stamp duty land tax bill. The governor of the Bank of England made clear that the markets now expect interest rates to increase, but to a more limited extent and at a more gradual pace than he did just three months ago. This is already having an effect on mortgage rates. Fixed rate loans have fallen to record lows – even those fixed for 10 years have reached a low of just over 4 per cent, below the prevailing average standard variable mortgage rate.
This combined with the cut in stamp duty land tax bills is good news for the housing market in the short term as cheaper finance and lower transactions costs make it easier for most people to move. So we should expect to see more activity in the housing and mortgage markets in the run up to the election – which should trump the usual pause in transactions experienced prior to previous general elections.
Fionnuala Earley is residential research director of Hamptons International
Changes to stamp duty and cost savings
House
Price New Stamp Duty Old Stamp DutySaving/Cost?
£600,000£20,000£24,000£4,000
£750,000£27,500£30,000£2,500
£900,000£35,000£36,000£1,000
£1,000,000£43,750£40,000-£3,750
£1,500,000£93,750£75,000-£18,750
£2,000,000£153,750£100,000-£53,750
Source: Hamptons International Research
Key Points
It was surprising that the chancellor chose to overhaul the system of stamp duty land tax in England and Wales to make most buyers pay less tax than before last year.
For England and Wales, the first £125,000 of a property will not be taxed at all, while buyers of properties valued from £125,000 to £250,000 will be charged at a 2 per cent rate.
The change should boost transactions and prices, but this will only be a temporary effect.
