Will the Stamp Duty Cut actually Help First Time Buyers?
The property market is a fickle industry, often left to speculation and trial and error. It’s a well-known problem in the UK that property prices are too high and first-time buyers are pushed out.
The Stamp Duty tax has been blamed for the housing market slow-down but Chancellor Phillip Hammond, as part of his measures to increase both home-building and first-time buyer movement, has announced a cut in the stamp duty tax for first-time buyers.
What Are the Changes?
Chancellor Hammond announced that starting immediately; there will not be a stamp duty for all properties purchased by first-time buyers up to £300,000. This move will also help first-time buyers who purchase properties up to £500,000 because the first £300,000 will not be subject to the stamp duty, more than double the original tax-free £125,000. This should save 4 out of 5 first-time buyers up to £5,000.
There is currently a 2% stamp duty on every pound over £125,000 up to £250,000. Therefore, a property for £225,000 would have a £2,000 tax, if you had a £300,000 property, you would have to pay £5,000, but now these properties are exempt.
Furthermore, properties purchased by first-time buyers within the £300,000 – £500,000 price range will have a 5% tax on the price above the £300,000 threshold. Therefore, the stamp duty on a £500,000 property is now £10,000 rather than £5,000. Properties above the £500,000 price mark remain unchanged, including for the first £300,000 of the property purchase price.
Hammond has been under pressure to make changes to the stamp duty rates, as critics suggests its adding fuel to the fire for first-time buyers. Although the tax is a solid source of revenue for the Treasury, with more than £8bn made as a result of the tax in 2016, the cut will cost the Treasury more than £3bn. However, it could save the buyer £1,660 on average
Some of the research suggested that this stamp duty cut could be exactly what first-time buyers needed. HouseSimple suggested that 43% of properties on the market would be available tax-free if the stamp duty were to be frozen for properties above £250,000. The Treasury suggests that 80% of first time buyers will not have to pay the stamp duty now.
The stamp duty threshold will have a big impact on the amount of tax-free properties, for example, according to HouseSimple:
London: 49,733 properties for sale
• Percentage priced at £125,000: 0.3%
• Percentage priced at less than £300,000: 5.3%
Oxford: 585 properties for sale
• Percentage priced at £125,000: 0.9%
• Percentage priced at less than £300,000: 5.3%
Bristol: 1,828 properties for sale
• Percentage priced at £125,000: 3.2%
• Percentage priced at less than £300,000: 65.5%
Hull: 1,120 properties for sale
• Percentage priced at £125,000: 69%
• Percentage priced at less than £300,000: 98.2%
The stamp duty tax cut is one of many measures implemented to help increase home ownership around the UK.
Other changes include:
• Local authorities can charge double council tax on vacant homes.
• Increased funding for loans to boost housing supply by 300,000 by 2020.
• Resources for a review into the gap between homes granted consent for planning and the number of homes actually built.
• Eliminating borrowing caps for local authorities in expensive areas to encourage them to build more homes.
Who Qualifies as a First-Time Buyer?
First-time buyers will have to enter a code on their stamp-duty tax return to declare their status, but who actually qualifies as a first-time buyer?
• has never owned freehold / leasehold property
• is purchasing their only / main residence
• has never owned property anywhere in the world
Furthermore, in a joint purchase, both purchasers must qualify as first timers to benefit from the tax-exempt status.
Who Will Benefit from the Change?
In 2008, during the financial crisis, then Chancellor Alistair Darling temporarily increased the stamp duty threshold from £125,000 to £175,000, in addition to introducing a payment holiday for first-time buyers (an agreement to temporarily stop or reduce mortgage payments). However, the HMRC showed that the majority of money saved from the tax change simply went into higher property prices.
The Office for Budget Responsibility (OBR) immediately criticized the measure suggesting it will have unintended consequences for property prices. The OBR said the tax break would push property prices up 0.3%, especially in areas where buyers are competing for properties. The first-time buyers will have more money in their pockets to purchase, but because they are competing with each other, they will have more money to make an offer with, resulting in increasing prices. The OBR suggests the real winners will be people who already own properties, rather than first time buyers.
First time buyers and investors will both probably enjoy the tax cut, while first time buyers will have extra money for purchasing and borrowing, investors might see their property values increase as the stage becomes more competitive. Furthermore, this cut still does not address the fact that first-time buyers struggle to save for a deposit. For those who are worrying this will simply increase the asking price, as supply remains stagnate, it is not enough.
Perhaps more importantly than the tax cut, is Hammond’s reiterated commitment to building 300,000 homes a year and the increased funding to help reach that goal. He has pledged £34m to develop construction skills for the building sector and £8bn to private house builders. However, last year, less than 220,000 new homes were constructed.
Everybody welcomes the announcement of additional funding for property construction, but people remain skeptical of its execution. The Chancellor has said that they are taking immediate action to help young people get more cash in hand for their first property purchase.
More recently, Rishi Sunak has changed the stamp duty rules and there is now no duty due on properties worth less than £500,000 in London and £300,000 for the rest of the country. Our discussion about the new stamp duty changes can be found here.