With months left until the stamp duty holiday ends, our guide explains how you could benefit from the tax cut.
The Chancellor, Rishi Sunak, unveiled a major stamp duty cut in July in a bid to boost the housing market.
He raised the threshold at which buyers have to start paying stamp duty with immediate effect, from £125,000 to £500,000, in England and Northern Ireland.
It means that nearly nine out of 10 transactions are no longer subject to stamp duty, with the average bill falling by £4,500.
But the stamp duty holiday is set to run until 31 March 2021 so buyers have just a few more months to take advantage of the break.
Here’s our guide with more detail on what exactly the stamp duty holiday is - and how you could benefit from it.
What is stamp duty?
Under normal circumstances, buyers must pay stamp duty when buying a home or a piece of land worth £125,000 or more in England and Northern Ireland. It is charged on a tiered basis (so you only pay the higher rates on the slice above any threshold – the same as income tax).
These are the rates:
- Up to £125,000: 0%
- On the portion from £125,001 to £250,000: 2%
- On the portion from £250,001 to £925,000: 5%
- On the portion from £925,000 to £1.5m: 10%
- Above £1.5m: 12%
There are exemptions available for first-time buyers, who don’t have to pay stamp duty on the first £300,000, so long as the home doesn’t cost more than £500,000.
Meanwhile, people buying additional property for £40,000 or more, such as second homes, pay an extra 3% of stamp duty on top of regular stamp duty rates. The surcharge effectively works as a slab tax. In other words, the 3% loading applies to the entire purchase price of the property.
So how does the stamp duty holiday work?
Sunak’s holiday means that buyers now only start to pay stamp duty on property above £500,000 in England and Northern Ireland.
This is for people buying their first home, or moving up or down the housing ladder.
These are the holiday rates:
- Up to £500,000: 0%
- On the portion from £500,001 to £925,000: 5%
- On the portion from £925,001 to £1.5m: 10%
- Above £1.5m: 12%
The 3% stamp duty surcharge applies on top of the holiday rates, so people buying additional homes attract a 3% stamp duty bill on the first £500,000 of property.
This still results in a saving, because the 3% rate previously applied on the first £125,000, with higher rates above that.
We’ve drawn up a handy interactive table to reveal just how much buyers could save.
It is worth noting that similar cuts have been introduced in Scotland and Wales, where the property tax is different.
The Scottish government has increased the threshold of its Land and Buildings Transaction Tax (LBTT) from £145,000 to £250,000.
And the Welsh government has raised the threshold of its Land Transaction Tax (LTT) from £180,000 also to £250,000.
1/ I have decided today to cut stamp duty.— Rishi Sunak (@RishiSunak) July 8, 2020
Right now, there is no stamp duty on transactions below £125,000 (or £300,000 for first-time buyers). I am increasing the threshold to £500,000. #PlanForJobs pic.twitter.com/DN3UnOJd1u
Why has the Chancellor introduced the measure?
There were several calls earlier in the year for a stamp duty holiday to encourage people to move home and to help revive the housing market more generally as lockdown eased.
But a stamp duty holiday is not only about helping people move home. It’s also about how important the housing market is to the economy as a whole.
People moving home need to organise their finances and utilities. They may also want to redecorate, buy additional furnishings or spruce up the garden. And all of this supports the retail sector.
Richard Donnell, director of research and insight at Zoopla, said in July: "The government would hope that the savings feeds into additional spending in the real economy with more cash spent on home improvements and white goods rather than enabling buyers to spend that bit more on their next home."
Who benefits from the stamp duty holiday?
But while the tax cut means significant savings for some buyers, others will see no change. For example, first-time buyers purchasing a home in England or Northern Ireland for up to £300,000 have been exempt from this property tax since 2017. This helped around 214,000 buyers purchase a home in 2018/19.
And although stamp duty may be payable (excluding the first-time buyer exemption) on 85% of all property transactions, the impact is not the same across England and Northern Ireland.
London and the South East were always set to benefit the most from a stamp duty holiday because higher average prices mean that buyers in these regions can make the biggest savings.
And our data revealed a 27% jump in demand from purchasers in London in the first few weeks after the Chancellor’s announcement was made.
Have there been stamp duty holidays in the past, and have they worked?
Yes. And sometimes.
The stamp duty holiday introduced during the recession in late 1991 to 1992 was at a time when the housing market slumped (amid very high interest rates).
The stamp duty rate at that time was just 1%. The threshold was temporarily raised from £30,000 to £250,000. The average price of a home was just over £50,000.
Despite this intervention, housing transactions in 1992 were still lower than in 1991 and house prices still fell. But the likelihood is the figures would have looked far worse without a stamp duty holiday.
During the financial crisis in 2008 to 2009, another stamp duty holiday was introduced.
This holiday raised the lowest threshold for paying the 1% rate of stamp duty from £125,000 to £175,000. The rates for more expensive properties were 3% and 4%.
The average price of a home at this point was just under £175,000.
The level of transactions fell by 5% in 2009, but this came after a 44% decline in 2008. It was followed by a 3% rise in activity in 2010.
But some of this can also be attributed to price adjustments and the beginning of green shoots in the economy.
Tell me more about the existing stamp duty regime.
The government introduced historic reforms to stamp duty in 2014. It saw the method of calculating the tax change - as well as the rates (Scotland followed with changes in 2015).
This effectively cut the tax bill on homes worth up to £940,000 (which account for more than 95% of households), but cranked up the charges for more expensive properties.
In 2009, the most expensive stamp duty band was 4%.
This is now 12%, rising to 15% for some buyers and 17% for overseas buyers purchasing in England from next year.
This map shows stamp duty charges under normal circumstances: