Autumn Statement News: Stamp Duty Update

Posted on 3 December 2014 by Ray Boulger

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The stamp duty land tax changes announced by The Chancellor are well overdue and the timing is clearly overtly political, which perhaps explains why it has taken George Osborne over 4 years to publicly admit that the slab system introduced by Gordon Brown was unfair.

The basis of the changes involves transforming the tax to the only sensible basis, but even after the leak shortly before the Autumn Statement this would be happening what remained unknown was the thresholds and rates. These seem very sensible, on the basis that most people (98% according to The Chancellor) will pay the same or less tax. 

The key thing about making the fax fairer is that there will no longer be no go areas for property transactions at just over £125,000, £250,000, £500,000, £1m and £2m.

The new rates are:

  • 0% up to £125,000
  • 2% on the excess up to £250,000
  • 5% on the excess up to £925,000
  • 10% on the excess up to £1.5m
  • 12% on the balance above £1.5m

Anyone who exchanges up to 23.59. on 3rd December can choose the old or new stamp duty land tax regime and so no one who has exchanged up to 3rd December will lose out. Some people buying expensive properties will be rushing to exchange today and so I expect many solicitors had a late night!

As a result of these changes some people with property theoretically worth a little over the old thresholds who previously held off selling because they knew they were unlikely to obtain the real value of their property will now think about doing so. Likewise, buyers will be prepared to pay what they think the property is worth because the additional stamp duty cost will now be small.

The consequence will be to increase activity in the property market, right across the UK, which will obviously be beneficial for the economy as a whole and generate extra associated tax revenue, e.g. from VAT, as most people spend several thousand pounds on VATable items when they move home. It will also provide an employment boost for the raft of activities, from estate agents, mortgage brokers and solicitors to shops selling items such as carpets and curtains. 

As far as the mortgage market is concerned, at the margin a few borrowers might find they can bring their LTV below the next 5% threshold as they will have less cash to find upfront.

Although in isolation these changes are negative for the top end of the market, I think it significantly reduces the already highly dubious argument for Labour's mansion tax, although initial comments from Labour Shadow Ministers suggest for the time being they are sticking with plans to introduce such a Tax, should they win next year’s election. With a 12% tax rate now applied above £1.5m on property purchases we are in danger of killing the goose that lays the golden egg if in addition to this a substantial additional annual wealth tax is imposed on such buyers.

Most people thinking of buying a £2m plus property would probably rather pay an admittedly sizable one off additional amount of tax when they buy a property, and can more easily budget for it, rather than be stung for several thousand pounds every year indefinitely, particularly as, based on past form, once a new tax is introduced the amount payable is likely to increase frequently, even if only in line with inflation.

Another point worth noting is the likely impact on the value of property close to the Scottish border, which is particularly interesting because it will be the first time Scotland’s devolved powers result in a substantial difference in any tax north and south of the border. For very high value properties the new UK rates will reduce the differential that would otherwise have applied post 1/4/15.

However, for properties purchased at up to £937,500 the differential will increase post 1/4/15 and in some cases the Scottish tax will be more than double what is charged south of the border. For example at £500,000 a buyer in England will pay £15,000 (the same as before today), whereas the same property in Scotland will incur a tax charge of £32,300. 

This sort of differential (3.5% on a £500,000 property) is enough to impact on relative values. The net effect will be that, other things being equal, property values above £255,000 south of the border will outperform those north of the border after 1 April 2015 until a new equilibrium is found.

However, in the very short term, i.e. over the next 4 months, today's changes significantly increase the incentive for Scottish buyers above £255,000 to transact before 1 April 2015. Hence there is likely to be a short term boom in the price of Scottish properties, not just those in the Border area, worth more than £255,000.

Usually when property tax is increased it applies from the day after it is announced but now that many potential buyers in Scotland have 4 months notice of a massive tax increase they have a huge incentive to transact quickly. So expect Scottish property prices to be strong until March and fall back after that. It was perhaps rather naive of the Scottish Government to announce its new property tax rates so far in advance of implementation! 

The table below shows the amount of tax payable at the old rates and the new rates, plus the rates that will apply in Scotland from 1 April 2015.

Price

UK – old rates

New rates in UK excluding Scotland

New rates in Scotland

£150,000

£1,500

£500

£300

£200,000

£2,000

£1,500

£1,300

£250,000

£2,500

£2,500

£2,300

£300,000

£9,000

£5,000

£7,300

£375,000

£11,250

£8,750

£14,800

£500,000

£15,000

£15,000

£32,300

£750,000

£30,000

£27,500

£52,300

£937,500

£37,500

£37,500

£71,050

£1.0m

£40,000

£43,750

£77,300

£1.5m

£75,000

£93,750

£137,300

£2m

£100,000

£153,750

£197,300

£5m

£350,000

£513,750

£557,300

Unfortunately comments in The Chancellor’s speech suggest the current Government still has no appetite for a wholesale Council Tax revaluation.  This is now well overdue and the longer it is delayed the more problems the inevitable eventual revaluation will cause. Now that stamp duty land tax has been made fairer there is a serious danger that Council Tax will increasingly be seen as the most unfair property tax and thus generate increasing criticism for whichever party(ies) is in power.

Several firms offer automatic valuation models and a tender for the contract to revalue the whole of the UK residential property stock would undoubtedly only cost a few pounds per property for the majority which could be valued in this way, although of course one would also have to factor in the cost of appeals.

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The views expressed here are those of the author and do not necessarily represent or reflect the views of John Charcol Ltd

Categories: Property market, Mortgages, Personal finance, House and home

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