What a replacement for Stamp Duty may look like and how it could affect you

In 2020, Chancellor Rishi Sunak’s announced a Stamp Duty holiday intended to save buyers a significant amount of tax when moving home, which gave a strong boost to the housing market. Recently, however, some industry experts have called for the government to abolish, or at least replace, this tax to give a further boost to the housing market.

If you’re looking to buy or sell a house in the near future, you may be wondering what such a change could involve. Read on to find out what the replacement of Stamp Duty may look like, and how it might affect you.

The Chancellor implemented a temporary Stamp Duty holiday to support the housing market

Stamp Duty is a tax based on the value of properties that are above £125,000. Above this threshold, the tax is calculated in bands depending on the value of a residential property:

  • £125,000 to £250,000 – 2%
  • £250,000 to £925,000 – 5%
  • £925,000 to £1.5 million – 10%
  • Above £1.5 million – 12%

So, for example, if you paid £400,000 for a home, you’d pay some Stamp Duty at 2% and some at 5%.

During the initial lockdown in 2020, the housing market suffered as surveyors and prospective buyers were unable to view homes due to social distancing rules. This caused stagnation and a slight fall in house prices in the spring.

To protect the housing market, the Chancellor announced a temporary Stamp Duty holiday. Buyers were now able to save up to £15,000 in tax if they purchased a property before 31 March 2021.

This worked as intended, giving many buyers a strong incentive to move. As a result, the housing market experienced a “mini-boom”. According to the BBC, this boost caused house prices to grow by 8.5% in 2020, despite the economic effects of the pandemic.

Stamp Duty’s reintroduction may cause significant disruption to the housing market

As the holiday draws to a close, some experts are concerned that the reintroduction of Stamp Duty might have significant knock-on effects for the housing market.

According to a report by property analyst TwentyCi, published in the Times, more than 300,000 sales could be affected by the reintroduction of Stamp Duty. This is because a significant portion of buyers can only afford to move due to the tax saving it provides.

If many of these buyers pulled out of their home sales, it would have a significant effect on other sales in the chain. For example, a seller who now no longer has a buyer would probably be forced to pull out of their own property transactions.

This prospect has caused many experts in the industry to petition the government to extend the holiday and prevent such disruption.

Some campaigners have even gone a step further and called for a rethink of Stamp Duty, as well as a more radical and “fairer” approach to property taxes in general.

While the government is unlikely to extend the holiday, due to the ballooning cost of their pandemic response, a reform of Stamp Duty may be on the books.

Critics have argued Stamp Duty should be replaced with a “fairer” tax

One of the most vocal critics of the current property tax policy is the charity Fairer Share, who argue that both Stamp Duty and Council Tax should be scrapped and replaced with a single new tax.

A common criticism of Stamp Duty is that it disincentivises people from moving home as they need to save up a significant amount of money to pay for the tax, on top of the cost of a mortgage deposit.

Fairer Share argue that a replacement tax should instead target property owners, rather than buyers.

Their proposal is that a “Proportional Property Tax” should be charged annually at 0.48% of the property’s value. If implemented, the owners of a £200,000 home would pay £960 per year, for example.

At this tax rate, the Proportional Property Tax would raise as much revenue as Stamp Duty, but would also mean an effective tax cut for around 18 million households.

Furthermore, under Fairer Share’s proposals, second and foreign homes would have to pay a higher tax rate of 0.96%. They have also suggested that Stamp Duty could remain in place for buyers of such properties.

The reform would help buyers, but impact multiple-property owners

If the government did agree to such a reform, it’s unlikely that there would be any immediate change, but it is possible that it may happen in the future.

With rising house prices, many buyers have been struggling to afford the deposit needed to secure a mortgage on top of the associated tax cost. Reforming the tax to target owners, rather than buyers, could be a good way to stimulate the housing market.

If the government did implement the change, you may also see a fall in your overall taxes due to the removal of Council Tax.

However, the change would be bad news for landlords, as owning multiple houses could see you hit you with a significantly larger tax bill.

Get in touch

If you’d like to know more about what the proposed tax changes would mean for you, we can help. Email enquire@london-money.co.uk or call us at (0207) 808 4120 to find out more.