Stamp duty holiday explained: what it could mean for you

Richard Donnell, research & insight director at Zoopla said: “The immediate increase in the stamp duty threshold will help sustain the rebound in housing market activity across England.

“The government will expect the change to stimulate more housing sales over the second half of the year and that savings made by buyers will be reinvested in home improvements, white goods and furniture, rather than bidding up the cost of housing.”

Here’s how the stamp duty holiday could impact you.

What is stamp duty?

Buyers must pay stamp duty when buying a home or 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.

It is worth noting that stamp duty is different if the property or land is in Scotland or Wales.

So how will the stamp duty holiday work?

Sunak’s new measure means that buyers will only start to pay stamp duty on property above £500,000.

This will be for people buying their first home, or moving up or down the housing ladder.

These are the new 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 will apply on top of the new holiday rates, so people buying additional homes will attract a 3% stamp duty bill on the first £500,000 of property.

This will still result 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.

Why has the Chancellor introduced the measure? 

Since April, there have been several calls for a stamp duty holiday to help revive the housing market as lockdown eases.

Our calculations in April showed that housing transactions could be down by 50% this year, which could mean halving stamp duty receipts to £4bn – assuming house prices don’t change.

The theory is that giving potential buyers an effective tax break (by cutting their stamp duty bill) will encourage them to move home.

The ‘holiday’ aspect means there’s an impetus to act because it’s not a permanent change.

There’s an argument that this only brings forward activity that would have happened anyway. But when trying to give the economy a boost, this seems acceptable.

The evidence is that a stamp duty holiday can boost sales activity overall. House prices may differ across the country, but if one part of the market starts to seize up, this affects other parts of the market and the wider economy.

The cost to the Treasury of the stamp duty holiday will be significant. But given the current circumstances, it’s relatively modest when compared to the £39bn it’s reported to cost the government to run the furlough scheme for three months.

Also, the cost of stamp duty relief is unlikely to be ‘lost’. Instead, it could boost the economy as buyers redirect those funds to spending.

A stamp duty holiday is not only about helping people achieve their goals in terms of housing. It’s also about how important the housing market is to the economy as a whole.

When you move into a new home, you need to organise your finances and utilities.

The act of moving includes other services too. You may want to re-decorate, buy additional furnishings or do something with the garden. All of this supports the retail sector.

This ‘network’ effect on the economy means that the government is keen to encourage housing mobility.

Donnell said: “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 will benefit from the stamp duty holiday?

The stamp duty holiday is welcome news for buyers, estate agents and developers after the housing market was effectively brought to a halt by the coronavirus crisis.

Sunak’s move will mean significant savings for some buyers at the lower end of the housing market in particular.

But 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.

Stamp duty may be payable (excluding the first-time buyer exemption) on 85% of all property transactions. But from a geographical perspective, the impact of the tax is not the same across the country. This is because of the wide range in average house prices.

This is backed up by stamp duty data, which shows that buyers in London and the South East paid 72% of all receipts in 2018/19.

In other words, the average property price in London far exceeds the lowest interest-free threshold for the area.

This is further demonstrated in the stamp duty revenues received by each region.

In London, the South East and the Midlands, the proportion of sales where this tax was not payable was under 5%.

In parts of the north of England, more than 40% of sales were not liable for stamp duty.

In short, it would largely be homemovers in London, South East and parts of the Midlands who would benefit most from a stamp duty holiday.

In fact, our data reveals that the greatest beneficiaries of Sunak’s stamp duty holiday are affordable areas in and around London, where up to 95% of sales would be stamp duty-free.

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 the 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.