Critics say move will push up house prices in short term, but inflation and rate rises may limit long-term impact.
The fiscal event last week presided over by new chancellor Kwasi Kwarteng aimed to boost the UK economy out of a recession. Besides the recalibration of SDLT, measures included tax cuts for high earners, including abolishing the 45p top rate of tax, and a new bill to reform planning laws, with new investment zones announced.
The stamp duty changes include doubling the level at which the tax comes into effect from £125,000 to £250,000. For homes over £250,000 and up to £925,000, a 5% stamp duty rate will apply; from £925,000 to £1.5m, a 10% duty will be charged; and anything over £1.5m will be taxed at 12%.
The threshold for first-time buyers was raised to £425,000 from the previous £300,000.
The changes are permanent, unlike previous stamp duty relief schemes such as the cut during the Covid-19 pandemic, which aimed to avoid a housing market collapse during an unprecedented shutdown of the economy.
The government says the changes will allow an extra 29,000 people to move home each year, which will boost household consumption. But the changes have been met with mixed reactions from experts.
“I’m relieved this isn’t a barmy stamp duty holiday that creates a cliff edge like we’ve experienced in the past couple of years,” says Simon Nosworthy, head of residential conveyancing at Osborne’s Law.
“But this permanent stamp duty tax cut ultimately isn’t likely to have much of an impact compared with bigger issues the market faces, such as ever-increasing demand for housing and increasing mortgage rates.”
Jamie Pritchard, director of sales at residential lender Glenhawk, argues that the stamp duty cut will simply push up prices in the near term. “The untimely stamp duty reduction will only create an inflationary bubble in the property market, pricing out more first-time buyers,” he says.
“The property market is already red hot, and the stamp duty holiday introduced by Rishi Sunak in 2020 only appeared to benefit the South East, London and the wealthy.”
Pritchard is not the only industry professional who believes the market will simply be inflated higher in the short term, as the tax cut drives activity but is also swallowed up by rising prices.
Catherine Williams, partner and head of living at law firm Shoosmiths, believes the SDLT cut may be irrelevant in many places such as the South East, but exacerbate affordability issues by stoking demand.
“While creating an uptick in activity, these concessions are unlikely to ease the pressures the UK housing market faces,” she says. “This risks creating another mini-boom and furthering the lack of affordability loop.”
Solving the stamp duty conundrum has been high on the agenda for various chancellors for decades. The tax can dampen transactions, giving people an incentive to stay in one property and not move to a more suitable home. Back in 2016, director of the Institute for Fiscal Studies Paul Johnson wrote that the tax was “dysfunctional” and “rewards people for staying put, and punishes them for moving”.
However, the Treasury sees stamp duty as a money-spinner, previously forecast at circa £15bn annually over the next three years, or more than twice inheritance tax and on a par with capital gains tax.
The changes announced in last week’s mini budget have been promoted as a tax cut. But Jeremy Raj, national head of residential property at law firm Irwin Mitchell, says the changes may still bring in an equivalent tax take for the Treasury, depending on whether the stamp duty can boost demand.
“It [the stamp duty cut] appears to have been carefully constructed to ensure the overall SDLT take of [at least] £12bn will not take too much of a hit, given the very high rates at the top of the market, which account for a large percentage of the total,” he says.
The Council for Licenced Conveyancers is less sure the cut will have the desired impact, particularly in the current housing climate, saying in a statement that it didn’t expect “a spike in activity like the one we saw with the pandemic SDLT holidays”.
John Shallcross, real estate lawyer at Blake Morgan, agrees that the nature of the permanent cut may not result in a sales boom. “In contrast to the previous stamp duty holidays, this reduction is permanent; the market is therefore unlikely to see the flurry of activity it saw back in 2020-21,” he says.
“Increasing the threshold for first-time buyers to £425,000, up from £300,000, is unlikely to benefit those in areas such as the north, where the average price for a first home purchase is likely to be lower than the new threshold.”
In the wider market, a cut in stamp duty may make little difference to buying sentiment. Some market commentators suggest it may be time to overhaul the stamp duty process altogether.
“I would argue that sellers should pay stamp duty instead of buyers, because that would make it easier for people struggling to go up the chain,” says Chris Hammond, director of Sussex developer Beau Property. “Downsizers that are more cash-rich would more easily be able to afford to pay it.”
Hammond also argues that to spur investment in upgrading UK homes’ energy efficiency, stamp duty could be linked to measures to insulate or refurbish homes.
Brian Murphy, head of lending at Mortgage Advice Bureau, agrees that SDLT should be overhauled. “This could turn out to be an excellent time to properly revisit the structure of stamp duty,” he says. “Numerous governments have tinkered with it, but it tends to push up prices for a short period, then momentum generally mellows.
“The crux of the issue is that any changes in stamp duty will not address the main problem now: a significant supply shortage.”
The issue of the longer-term supply of new housing has dogged the Conservative government for over a decade. However, without a major housebuilding programme similar to that of former prime minister Harold Macmillan, any slowdown in the market will inevitably hit the number of homes being built.
The stamp duty cut certainly comes at a significant moment for housing market sentiment, with both inflation and interest rates rising and a tightening of the market coinciding with the winding down of the government’s Help to Buy scheme, which helps fund deposits for first-time buyers.
Following the chancellor’s announcement last week, the value of sterling has plummeted. The pound has lost around 13% of its value against the dollar in three weeks, prompting speculation of a possible emergency intervention from the Bank of England. Market analysts anticipate that the bank may raise the base rate from 2.25%, which it now stands at following a 0.5% rise on 22 September, to as much as 5.5%.
A first-time buyer purchasing a home valued at £400,000 with a 10% deposit would need a mortgage of £360,000. If taken out for a 25-year term at an assumed interest rate of 6%, monthly repayments would stand at £2,319, compared with £1,615 at the current 2.5% rate. So monthly mortgage costs could dwarf any perceived benefit of an SDLT cut.
The stamp duty changes will feed through the market in the coming weeks, but with the turmoil in the financial markets threatening to affect the wider economy, the impact of any cut may be minimal.
As Macmillan wryly noted, the most troubling issue for the property market may be simply “events, my dear boy, events”.
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