Stamp Duty

Stamp Duty Overhaul in #AutumnStatement and How it May Affect You

Today the chancellor George Osbourne announced his political #autumnstatement in front of a raucous crowd in the House of Commons. Being a home owner, and actively looking at buying a home at the moment, I was interested to hear if stamp duty was going to be part of the statement and if any kind of overhaul to this stepped tax system was going to be announced.

The rabbit that came out of the hat turned out to be an overhaul to the stamp duty system, much to my delight. Let’s look at the changes:

The old stamp duty tax system

Ending as of midnight tonight, the old stamp duty threshold will come to an end, and in it’s place comes in a new, marginal stamp duty tax system. This is how the old, stepped tax system worked:

Purchase price Stamp duty rate
Up to £125,000 0%
£125,000.01 – £250,000 1%
£250,000.01 – £500,000 3%
£500,000.01 – £1,000,000 4%
£1,000,000.01 – £2,000,000 5%
£2,000,000.01 + 7%
Correct at November 2014

A massive flaw in this system was that the thresholds were stepped, meaning if you bought a property in a certain threshold, you would pay that thresholds percentage on the entire price of the property. Meaning on a house costing £125,000 you would pay no stamp duty tax. However, you you paid a penny over, paying £125,000.01 you would be liable to pay 1% stamp duty on the full amount, totally £1,250.

This created distortions in the asking prices of properties, and black holes at the start of new thresholds.

The graph below shows how, at the lower end of the property market, asking prices spiked at the end of each threshold, and dropped dramatically at the beginning of the next.

sales volumes on property prices

The most alarming area is at the £250,000 mark. The peak and drop is very dramatic and clearly dictated by the stamp duty threshold rising from 1% to 3%, or in simple terms, the stamp duty tax raised from £2,500 to £7,500 if a penny over the £250k.

This bottle neck stopped properties in that price range from naturally going over the £250,000 mark. Good for buyers but bad for sellers.

The new stamp duty tax system

As of midnight tonight, the new stamp duty tax system comes into play.

The new stamp duty system is being overhauled and the thresholds changed. The most important aspect however is the change from stepped thresholds to marginal thresholds.

What this means is that you only pay the thresholds percentage of tax for the amount in that threshold, instead of the entire amount.

Let’s look at the new thresholds:

Purchase price Stamp duty rate
Up to £125,000 0%
£125,000.01 – £250,000 2%
£250,000.01 – £925,000 5%
£925,000.01 – £1,500,000 10%
£1,500,000.01 + 12%
Correct at 4th December 2014

At first glance you may feel you could be negatively affected by the new thresholds and tax percentages. 5% for example on properties within £250,000.01 – £925,000 may make you think you’ll be paying more stamp duty tax, but you won’t. In fact, you’ll only pay more tax if you’re buying a property worth more than £1.5m. If that’s you then too bad. On the other hand, if you can afford to spend over £1.5m on a property then some would argue you can afford to pay the extra tax – me included.

How does this affect me?

Remember, the new stamp duty tax system has moved from being stepped to marginal, so you only pay tax on the amount in that threshold, the same as your income tax.

As a quick reference guide, here is a table that shows the before and after stamp duty tax amounts for properties of differing values.

Purchase price Old stamp duty NEW stamp duty Savings
£100,000 £0 £0 £0
£150,000 £1,500 £500 £1,000
£200,000 £2,000 £1,500 £500
£250,000 £2,500 £2,500 £0
£300,000 £9,000 £5,000 £4,000
£350,000 £10,500 £7,500 £3,000
£400,000 £12,000 £10,000 £2,000
£500,000 £15,000 £15,000 £0
£750,000 £30,000 £27,500 £2,500
£1m £40,000 £40,000 £0
Correct at 4th December 2014

So you can see where the savings will be made when compared to the old system.

This is all great news right?

Potentially yes, potentially no, depends how you look at it and how these changes will affect asking prices moving forward.

Simply put, if asking prices stayed the same then you’d benefit clearly as you’ll be paying less, or the same tax as before.

However, by changing the stamp duty tax system, the government could potentially be opening the flood gates in those bottled necked threshold areas shown in the graph above and allowing sellers to ask more for their properties without worrying too much about the threshold putting buyers off.

Sellers

A seller who had a property worth £260,000 for example, previously may have been forced to market it below the 3% threshold to attract more buyers. Now, they can confidently market that property at it’s true value of £260,000 and not have the issue of stamp duty casting a long dark shadow over them.

Buyers

Buyers will now face real values of properties that were previously being forced into those black spot area, the lower taxable thresholds. Where they save on stamp duty, they’ll arguably lose again on higher asking prices.

Real values, fair taxes

All in all, both sellers and buyers benefit to some extent by these changes. I fear however that some estate agents will help to over inflate the asking prices of some properties previously caught up in the stamp duty threshold black spots now that the shackles are off. Happy days for sellers but not so great for buyers, especially first time buyers. On the other hand, those increases are mortgageable and they don’t have to cough up as much for up front stamp duty taxes.

Be interesting to see how the markets react in 2015.

Gary Hartley

Gary Hartley is The Floating Frog. A seasoned freelance web designer with skills in UI/UX, CRO design, WordPress, branding, PSD-HTML conversions and more. Got a project you need to start or take to the next level? Please, get in touch!