One of the worst designed, damaging taxes was radically reformed affecting most buyers and investors purchasing homes in the UK.
It was the biggest rabbit pulled from George Osborne’s hat in the Autumn Statement.
The sweeping reforms which ended the old ‘slab structure’ which distorted property values will mean the vast majority of transactions will benefit from lower taxes.
The Old System
Under the old system Stamp Duty was charged on homes costing more than £125,000, but escalating where the values were more than £250,000, then again at £500,000, £1million and £2million.
What this meant was a prospective homebuyer buying a property for £125,000 paid no tax, but this jumped to £1250 (1%) when buying a property for £125,001.
Consider this: paying 1% stamp duty (£2500) on a property worth £250,000 but paying £7500 (3%) while buying a property for £250,001. It just didn’t make any sense and distorted the prices that properties sold at around the £250,000 and £500,000 marks.
It effectively meant that home owners wouldn’t pay any more than £250,000 for a property that probably should have been anything up to a value of around £270,000.
The New System
Prospective home buyers now pay the rate of tax on each part of the property price within each band in a similar way that would do with income tax. This progressive approach now means the dead zones from each band are now removed.
Under the old system if you bought a house for £275,000 – 3% on the entire price would result in a £8250 tax bill.
Now you would pay nothing on the first £125,000, then 2% on the next £125,000 and the remaining 5% on the final £25,000 – meaning paying only £3750 of tax. You would essentially save £4500 under the new tax rules.
The new Stamp duty bands are:
• £0 to £125,000 – No tax
• £125,001 to £250,000 – 2% tax
• £250,001 to £925,000 – 5% tax
• £925,001 to £1,500,000 – 10% tax
• £1,500,001 and over – 12% tax
A Good Move
The new move has been well received as 98% of buyers will be better off under the new system – but buyers, especially in London and the South East paying more than £937,500 for a property will pay more tax under the current system and will be harder hit.
But nonetheless the progressive tax-style branding means there will be more winners than losers.
It ends a big shift from the outdated slab style system meaning many buyers will now have more cash in their pocket as someone buying a £550,000 property will now only pay £17,500 rather than £22,000.
For First Time Buyers the new move is very beneficial. It means someone buying a property for around £180,000 will save £650 under the new reforms. This reduction in upfront costs for younger buyers will further boost Government assistance schemes in getting buyers on the housing ladder.
On the flip side they are also likely to be worse off because of the boost it will give house prices
The tax saving would mean although buyers will have more money towards a property- all buyers would be in the same position meaning the saving would be absorbed into higher property prices.
Also vendors would take advantage of the tax cut by pushing up their house prices around the thresholds. Previously a seller would have kept their house below £250,000 but now could market it above £260,000.
Was this a ploy by the Chancellor to engineer a mini housing boom before the May election? Did he pull a greater magic trick than plucking rabbits out of hats?
There is no doubt the relaxation is pushing up house prices by quickly increasing activity in the market providing greater stimulus for the wider economy.
But what Osbourne wants most of all is a positive story to sell to voters, he wants them to accept that his tough policies over the years since 2010 have paid off.
You see over the past year the economy grew by 3% – the fastest of any developed Western country. But he’s still facing some challenging issues ahead.
Firstly the housing market slowed down more than initially expected
The FCA tightened mortgage conditions over affordability concerns. House prices have risen steeply in comparison to incomes and the fear of interest rate rises is lurking in the background.
He wants to be in a position where any blips can be swiftly addressed in the short term ahead of the election and the stamp duty reforms may have just given the boost he needed to a similar way to the 2008/9 holiday.
By the time the May election comes around, we will already have had the first quarter of the GDP figures which will show a sudden uplift furthering the Conservatives campaign.
Will the GDP beat expectations?
Will it offset a dip elsewhere in the UK economy? Either way one thing is for sure: Osbourne will be hedging his bets ahead of the election with his stamp duty reforms in place for a Conservative victory.