What is stamp duty? How the new cuts will affect UK house prices and landlords

Cuts to stamp duty outlined in the Government’s mini-Budget have been criticised for needlessly stoking already stratospheric property prices.

Chancellor Kwasi Kwarteng has moved to double the amount at which stamp duty takes hold for all home purchases, meaning the first £250,000 of a property’s price will be exempt from the levy compared to just £125,000 now.

Help for first-time buyers was equally generous, with the threshold at which stamp duty begins rising from £300,000 to £425,000, while the maximum value of a property on which first-time buyers can claim relief on was increased to £625,000 from £500,000.

All these changes take effect immediately in England and Northern Ireland while the devolved Scottish and Welsh governments will receive funding that they can use to replicate the policy.

Some experts have praised the move for boosting activity with Nicky Stevenson, managing director at estate agency firm Fine & Country, saying Mr Kwarteng had “swung his axe boldly to cut stamp duty”.

“This is a huge moment for the UK housing market. In the short-term, slashing buyers’ moving costs will help mitigate the pain of higher interest rates.

“In the long-term, it will encourage homeowners to sell family homes and downsize more cost effectively, while also motivating housebuilders to get more spades in the ground as first-time buyers take advantage of the increased no duty threshold.”

However, others have said this could actually cause damage to the market, increasing prices even higher at a time when affordability is stretched.

Joe Garner, managing director at London-based property developer NewPlace, said that introducing a cut to stamp duty five weeks prior to the deadline for help-to-buy loans [on October 31] was “likely to see a mass surge of last minute transactions, followed by a huge drop-off after the deadline ends”.

“It is irresponsible, populist politics that will likely see house prices increase further and decouple even more from income,” he said.

“It is likely to be the final push on the pump that sees the housing price bubble burst, leaving recent first-time buyers and purchasers in negative equity, whilst speculators swoop in on below market opportunities.”

i takes a look at what the changes mean for the house prices, landlords and first time buyers.

What is stamp duty?

Stamp duty is a tax paid by people purchasing a new home, and is split into bands.

The first £250,000 of a property’s price will now be free of stamp duty, compared to £125,000 prior to the Budget, while the other rates remain the same:

From £250,001 – £375,000 – 2 per cent

From £375,001 – £1,050,000 – 5 per cent

From £1,050,001 – £1,625,000 – 10 per cent

The remaining about above £1.625m – 12 per cent.

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What could this mean for house prices?

While proponents of the tax cut claim it will improve social mobility by reducing an unnecessary barrier to people’s desire to move properties, others fear that it will simply further separate house prices from income levels.

During the Covid-19 pandemic, the then Chancellor Rishi Sunak implemented a stamp duty holiday, which led to a rush of transactions and, some experts believe, pushed prices higher.

Earlier this month, the Halifax House Price index showed that house prices in August were up 11.5 per cent compared to the same month last year, pushing the average house price to a record £294,260.

If the reduction in stamp duty does spark a higher number of transactions, and this in turn pushes prices up, this could stretch affordability levels given that interest rates have now been pushed up to 2.25 per cent by the Bank of England, even though they were still as low as 0.1 per cent last year.

What does it mean for landlords?

The stamp duty cut has no changes for landlords as buyers of second properties, including buy-to-let landlords, will still have to pay a three per cent stamp duty surcharge.

Instead, the main changes for landlords came earlier this week after the base rate was hiked, reaching 2.25 per cent.

As a result, mortgage lenders have been rushing through rate increases as deals become more expensive by the day.

While homeowners with tracker mortgages will feel the impact of rising rates immediately, both those seeking to remortgage and first time buyers will face far more expensive fixes.

Mortgage brokers have warned borrowers that every lender has either already increased their standard variable rate (SVR) deals, or plans to do so in the next days and weeks meaning they will be paying more each month.

Shortly after the Bank’s rate rises was announced, NatWest also upped its “stress rate” from 4.75 per cent to 5.1 per cent, meaning that landlords are required to make a yield of at least 5.1 per cent on any property underwritten by the mortgage.

It is likely others will follow and, as a result, landlords will put up prices, meaning renters also face higher bills.

What does it mean for first time buyers?

Generally, stamp duty cuts are good news for first time buyers who will not have to pay reduced levels of stamp duty, if anything.

It is hoped this will encourage more to buy now, boosting the market.

However, there are some downsides.

There will likely be a rush of activity, pushing up house prices even further in a market that is already struggling with limited demand.

Tim Bannister, Rightmove’s housing expert, said: “Demand has been softening over the last few months but today’s announcement is likely to stimulate some more demand.

“If it does lead to a big jump in prospective buyers competing for the constrained number of properties for sale then it could lead to some unseasonal price rises over the next few months.”

However, it is also the case there could be a more gradual increase in demand compared with the surge when the temporary stamp duty holiday was announced in 2020 as a result of rising mortgage rates.

Mr Bannister added: “Buyers could save up to £15,000 during the temporary stamp duty holiday, while the savings are lower with this change.

“The first-time buyer threshold change means we could see more first-time buyers who can afford it making a jump to a bigger home as their first move.”

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