Since the Chancellor, Rishi Sunak, announced a Stamp Duty Land Tax (SDLT) reduction, the topic has dominated headlines for the past few weeks, seeing financial and property experts weighing in on the announcement. But what does it mean for the economy, the housing market, and for you? We’ve broken down some of the key points concerning the Stamp Duty reduction to answer these questions.
What is Stamp Duty?
Stamp Duty is a tax that applies to any private individuals or corporations that purchase a property within England and Northern Ireland. There are different versions of the tax in Scotland (Land and Buildings Transaction) and Wales (Land Transaction Tax); however, the new changes are only applicable to properties purchased in England and Northern Ireland.
Under the previous tax legislation, any properties purchased and completed before the 8th of July 2020 would have only paid Stamp Duty on anything over £125,000. For first-time buyers, Stamp Duty would only have been applicable on properties over £300,000. (1)
Stamp Duty is also applicable to landlords on buy-to-let properties. Under the old tax rules, landlords had to pay an additional 3% tax on any property with a buy-to-let agreement; this was on top of the existing Stamp Duty.
The income generated from Stamp Duty is funnelled back into HM Treasury and helps to fund government departments such as the NHS, public transportation and education.
What is the Reduction of the Stamp Duty Land Tax?
Rishi Sunak stated in the House of Commons that from the 8th of July until the 31st of March 2021 (inclusive), Stamp Duty would not apply to anybody purchasing a property under £500,000, a change from the previous £125,000 cap. Furthermore, Sunak also announced that a reduction would also apply to properties purchased over the £500k cap – while Stamp Duty still applies, the amount is much less than before. (2)
For example, if you purchased a property before the 8th of July costing £600,000, you would be liable to pay £20,000 in Stamp Duty. Under the current guidelines, if you complete on your property between the 8th of July 2020 and the 31st of March 2021, you will now pay £5,000 in Stamp Duty. If you purchased a property for £400,000 before the 8th of July, you would pay £10,000 in Stamp Duty – under the current guidelines; you will pay £0.
The rules do differ if you’re buying a second home – you’ll have to pay an additional 3% on top of the current rates. So, up to £500,000, you’ll pay 3% instead of £0.
We’ve listed a full set of rates here to give you a clearer idea of what you’ll need to pay. (https://www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#/intro).
Why Have They Reduced the Rates?
The Covid-19 pandemic has damaged the global and local economy, and we may not know the full extent of the costs for many years. Since March, house prices have been in a steady decline with each passing month; the hope is that the reduction in Stamp Duty will encourage people to purchase houses within the next nine months. This financial incentive will help boost the housing market and, in turn, the economy.
Russell Galley, Managing Director of Halifax, released a statement on the fall of house prices through the pandemic; “Average house prices fell by 0.1% in June as the property market continued to emerge from lock-down. Though only a small decrease, it is notable as the first time since 2010… that house prices have fallen four months in a row.” (3)
The concept behind the Stamp Duty reduction certainly seems logical for an immediate economic solution to the slump. Those looking to move home and having already saved for Stamp Duty, £10,000, for example, may have found themselves needing that money in the crisis. Those financially ready to buy a house may have needed to care for isolated loved ones suddenly or financially supporting furloughed or newly unemployed dependants. The majority of people have had any number of financial compromises during this challenging time, and this, in turn, may have prevented a pending house move.
The pandemic may have also turned people away from the idea of purchasing properties as the world seems far more uncertain than it did six months ago, and even with the Stamp Duty reduction, any property remains a substantial investment.
Will the Reduced Rates Help?
During his announcement, Rishi Sunak estimated that the average Stamp Duty Land Tax bill would fall by £4,500, with 9 out of 10 buyers taking advantage of the reduction and paying no stamp duty at all. But what does this mean overall? Will this help our economy survive its latest crisis? (4)
HM Treasury has estimated that the nine-month Stamp Duty ‘holiday’ will cost the Treasury around £3.8 billion. To put this into perspective, stamp duty usually creates £12 billion annually for the Treasury, which accumulates only 2% of its total income for the year. However, when we combine the cost of the furlough scheme to assess the overall economic impact of the pandemic (currently estimated at £80 billion and mass redundancies expected in October once the programme ends(5)), the stamp duty reduction feels like a drop in a vast ocean.
Opinions conflict within the finance and property industries as to whether the reduction in rates will dramatically change the economic landscape or the housing market. Some experts are concerned that the uptake in property purchases during the reduction period will only cause another slump further down the line in April once the rates end.
Will Scoular, Head of Private Client Lending at Investec, showed his concerns about a second slump: “We must be cautious that the removal of the support in March next year could cause transaction volumes to stall again, creating somewhat of a delay in the impact of the crisis unless permanent reform is introduced.”
While there may be a small slump next year, the reality of the current situation is that the Government’s commitment to the housing market does show promise. Tom Nicholson, Chief Operating Officer at Crest Nicholson, sees the Government’s proactive stance towards housing and development economics as a welcome and positive step in the right direction: “As the housebuilding industry returns from Covid-19 imposed shutdowns, it is encouraging to see the Government prioritising the current housing market, as it means a propping up of the national economy.” (6)
Property Wire has suggested that while the decrease in prices will reach a low of 1.4.% in August, from September, we may see a return to increases of 4.7% – while this upward trend is also speculative, it shows hope for the future.
Is This a Good Time to Buy, or Not?
The great thing about this moment is that if you’re ready to buy a house in the coming months, you’ll have already whittled away those extra thousands to cover your Stamp Duty costs – if this is the case, then yes, go for it! Save the extra money and invest it in your new house with a loft conversion or the new kitchen you’d hope to have one day.
Be prepared, however, that property prices may slump again in nine months – while that may not affect you purchasing your dream home now, you do have to stay practical. Ensure that your mortgage rate will take you through this period so you won’t find yourself in negative equity when you remortgage.
If you’re a landlord looking for a buy-to-let property, the consensus is to act quickly and snap yourself up a bargain as buy-to-let mortgages tend to be more expensive than regular residential mortgages. Steve Olejnik, Managing Director for Mortgages for Business, said: “Property investors are in a better position to qualify for a mortgage now that reduced Stamp Duty Tax allows them to wield a larger deposit.” (7)
If you’re looking for a property under the £500,000 limit, then the suggestion would be to continue your search while the Stamp Duty Land Tax is nullified for this price bracket. Negotiation has also never been more important at your offer stage. A slump in the market pre-Covid left many sellers unable to sell their properties and will see them hopeful now that the Stamp Duty reduction will solve their problems. The further decrease in prices since lock-down may mean you have even more wiggle room to negotiate on that final price. Moreover, watch for stimulated prices in this nine-month time frame. Some may try and take advantage of the Government’s housing market boost.