On the 22nd November this year the Chancellor has announced that the government is abolishing stamp duty for first time buyers. This will apply to England, Northern Ireland and Wales, but unfortunately not for the Scottish (They have their own laws on this kind of thing!) So, now stamp duty has been chucked out the window and the government has introduced Help to Buy schemes and lifetime ISA’s, what will this mean for you and the property market?
FIRSTLY, WHAT IS STAMP DUTY?
Stamp duty land tax (In it’s full title) is a sum of tax that you will have to pay when you purchase a property or a piece of land that is over a set amount outlined by the government. But the AMOUNT of tax you pay is dependent on a couple of things such as the price of the property and what kind of property it is e.g. commercial or residential.
Under the new legislation, you’ll only pay the tax on the proportion of the property that is over the set amount. Sounds complicated right? Well, Martin Lewis at Money Saving Expert has kindly come up with some examples to hopefully explain this better.
Under the old system: You are buying a property for £300,000.
You would have paid 1% for a property between £125,000-£250,000
You would have paid 3% for a property between £250,000-£500,000.
So you would pay 3% stamp duty tax because the property falls between the £250,000 and £500,000 threshold.
So you would pay £9000 in stamp duty land tax.
Under the new system: You are buying a property for £300,000.
You pay 0% on anything below £125,000
You pay 2% on a property that is between £125,000 and £250,000.
You pay 5% on the value of the property above £250,000.
So the way the system works is that you pay the percentages that the property falls in so it’s lots of little sums. For example, the property is £300,000 so…
You pay for the segments that the property fits in…
You pay 2% of £300,000 as it is more than £250,000 = £2,500
You pay 5% of £50,000 as that is what is left from the first bracket =£2,500.
Therefore in total you will pay £5,000 in stamp duty tax.
If you want to calculate how much tax you will pay on a property visit the HMRC website to use their stamp duty calculator or alternatively click on the link.
WHAT DOES IT MEAN FOR FIRST TIME BUYERS?
Like we said before, these changes only apply to those in England, Northern Ireland and Wales, but for those who are first time buyers in these areas you will pay:
- 0% tax on a property that has a purchase price of up to £300,000
- 5% on a property that has a purchase price of £300,001 to £500,000.
- But if you buy your first home which is higher than £500,000 you won’t benefit from any of the new changes and will be paying tax under the old system, this is the same for non-first time buyers too.
On paper, the cut in Stamp duty tax is good news for first time buyers who are taking their first steps onto the property ladder. Using the example we used above, that person who is buying their property for £300,000 will have effectively another £5,000 spare that they would have previously paid in tax. That extra £5,000 could be a huge chunk of a deposit for many first time buyers or could is also mean taking out a smaller mortgage on the property. Many people may have previously failed a mortgage affordability test however with this extra bit of relief people may be able to put down a bigger deposit and take out a much smaller mortgage. UNLIKE the Help to Buy scheme, the new changes aren’t restricted to new builds either.
BENEFITS FOR THOSE IN IN EXPENSIVE PROPERTY AREAS
London house prices are the highest anywhere in the country, especially for first time buyers where the house prices have hit their highest in 10 years. Borrowing in these areas are also on the rise and according to the Office for Budget Responsibility it is currently at around £3.31 billion mark. But with this cut in stamp duty for first time buyers, the affordability of a property in London and other expensive areas may be that little bit more affordable. Individuals can cut their borrowing slightly with their savings on their tax and use the little relief that they have towards their mortgage or furnishing their property.
COULD IT ALL GO WRONG FOR SOME PEOPLE?
HOW MANY WILL ACTUALLY BENEFIT?
Many people are saying that the savings for those who are struggling to get on the property ladder will be minuscule. So let’s have a look a bit deeper:
In 2016, according to Halifax’s First Time Buyer Review almost 1/3rd of all the properties sold were below the taxable threshold of £300,000. So the 30% or so who bought their first property last year will have seen absolutely no benefit at all from this.
And even for those who will benefit others are saying that the savings will be pointless and not as large as the government made out in their budget speech. The most anyone can save from the Stamp Duty cut is £5,000, this is on properties that are right up there on the threshold. In fact, only 26% of homes that were bought by first time buyers last year were below the £250,000 mark, therefore there is a high proportion who are not being helped by these cuts.
For example, in the North East of England, the average property for a first time buyer costs £125,591. So, remember that you only pay tax on the proportion over the bracket so these people will have been paying stamp duty on £591. They therefore save £11.82, A NANDO’S COST MORE THAN THAT!
To put it into perspective, those in Yorkshire will be saving just under £300 and here in the West Midlands, savings are estimated to be £845 (Now that’s a decent Nando’s.) But these figures do not come anywhere near what the Government have said that the savings could amount to.
IT COULD PUSH UP HOUSE PRICES
One of the biggest criticisms suggested by those who think that tax cuts are not enough is that it will inevitably push up house prices making the cut useless. Again, according to the Office for Budgeting Responsibility this tax break is likely to push property values up by about 0.3% with most of the increase to be seen within the next year. Therefore, looking at this logically, the tax cut was passed in order to help first time buyers step onto the property ladder, however the same cut may push up property prices and stop people from purchasing a property as it is too expensive. IT’S A VICIOUS CIRCLE!
Therefore the main gainers from this policy are those who already own property and are looking to sell within the coming years. Moreover it still doesn’t sound clear exactly what the government are going to do about the LACK OF AFFORDABLE HOUSING.
WHAT SHOULD THE GOVERNMENT DO TO REALLY SORT OUT THE PROBLEMS?
Realistically, whilst Stamp Duty like any other tax is an unwelcome expense it isn’t going to be something that opens the flood gates to property ownership. Especially in a society where the average deposit is around £30,000 and the savings from the Stamp Duty is like throwing an egg at a brick wall, it’s not really going to make a dent in the barrier.
For a lot of people there is no ‘magic bullet’ when it comes to breaking the barriers for prospective first time buyers but many argue the Government need to free up land for affordable housing! This is the biggest problem that the country is currently facing, there just isn’t enough affordable housing with many companies dodging their obligations to build this using certain loopholes. The Government needs to ensure that public land is used for housing and that there is enough pressure on firms to build this housing that is accessible to those who are desperate to buy their first property.
Other barriers still exist, such as the rise in deposits and the stagnation of wages as well as the rise in property prices. As it’s a month today until Christmas let’s look at it this way, for Christmas we really wanted a beautiful new bracelet or Xbox, and instead we got a pair of socks or some shower gel set. And with this stamp duty reform that’s what we got, we could do with a bit of a tax cut but it’s not the whole package. Through gritted teeth ‘Thanks Mr Hammond.’