A guide to stamp duty reforms

The Chancellor, George Osborne, in December’s Autumn Statement announced that a surprise reform of the stamp duty system, with the old arrangement, where the amount owed jumps at each threshold level, would be replaced by a graduated rate, working in a similar way to income tax.

Here is a brief guide to how the new set of rules work.

What is stamp duty?

Stamp Duty Land Tax (SDLT), to give it its full name, is a levy that purchasers have to pay when acquiring a property in the UK over a certain price. This is charged on all purchases of houses, flats and other land and buildings.

Different rates apply in Scotland from 1 April 2015 when Land and Buildings Transaction Tax (LBTT) replaces SDLT.

What level of SDLT was charged prior to the change?

Previously no one paid stamp duty if they were buying a property for less than £125,000.

After that there were five bands:

• Between £125,001 and £250,000 – a 1% charge;

• Between £250,001 and £500,000 – 3%;

• Between £500,001 and £1m – 4%;

• Between £1m and £2m – 5%;

• Above £2m – 7%.

Homes that are registered to companies rather than individuals and cost more than £500,000 have a rate of 15%.

Why was an overhaul necessary?

The stamp duty thresholds were one of the greatest structural issues within the housing market created by the fact that the tiered levels had not been adjusted in line with the retail house price index or inflation either up or down.

What’s more, the ‘slab structure’ of the levy meant that if a property fell into a particular band the entire cost of it is taxed at the related rate. For instance, a flat costing £130,000 attracted stamp duty of £1,300 (1% of the purchase price) and not just the bit above the £125,000 zero rate band.

There were also giant leaps in the tax bill when you crossed the other thresholds. So for example, a property costing £249,000 generated a tax bill of £2,490 (1%) while a home costing £250,001 attracted a bill of just over £7,500 (3%).

SDLT rates from 4 December 2014

Chancellor George Osborne’s sweeping reforms of the tax in December’s Autumn Statement will remove ‘dead zones’ before each existing Stamp Duty band and see a more progressive approach adopted where buyers will only liable to the portion of the property’s value above each new level. In other words, the slab structure has been scrapped and SDLT is now applied like income tax, with the levy charged at different rates depending on the portion of the purchase price that falls into each rate band.

Purchase price of property

£0 – £125,000

£125,001 – £250,000

£250,001 – £925,000

£925,001 – £1.5 million

Over £1.5 million

Rate of SDLT (percentage of portion of purchase price)

0%

2%

5%

10%

12%

Corporate bodies

SDLT is charged at 15% on residential dwellings costing over £500,000 bought by bodies like companies or collective investment schemes.

Is the change good news? 

That depends on how much the property is that you are buying. The government claims that anyone buying a residential property costing under £937,000 – about 98% of households – will face a lower SDLT bill, while anyone spending more will face a higher bill.

What do the experts have to say about the changes?

Lucian Cook, Savills UK head of residential research says: “The proposals are likely to make the market more fluid generally, stimulating increased transactions at the lower end of the market. That could have knock on positive impacts on consumer sentiment and the housebuilding industry. However, in our opinion, the prospect of rising interest rates and the reality of mortgage regulation are likely to prevent any significant bounce in house prices.”

Andrew Ellinas, director of Sandfords, comments: “The entire stamp duty system has been in desperate need of a reform for a long time and it does come as good news that the Chancellor has finally looked at each property band and updated it to become a payment like income tax. The implanted new bands seem fairer and less divisive than Labour’s proposed mansion tax on properties worth more than £2 million.”

Richard Lambert, Chief Executive Officer at the National Landlords Association (NLA), said: “We are delighted that the Chancellor has recognised the inequity of the SDLT ‘slab’ system. The NLA has argued for many years that a progressive system would offer a fairer and far less distorting means of taxing property purchases. What’s more important is that the introduction of a straightforward marginal system of taxation will mean private landlords will now not only face lower costs when acquiring property, but also have funds to implement property improvements and keep rents down.”

Peter Rollings, CEO of Marsh & Parsons, comments: “This Stamp Duty shake-up is long overdue, and the abolition of the archaic slab system will take the sting out of the tail for thousands of buyers on the lower rungs of the ladder. The new graduated system should help brighten the UK housing recovery in regions outside of London, where property prices are still battling back to pre-recession levels – but it will add to the weight of the tax burden shouldered by those buying more expensive homes. In Prime parts of London, where 56% of property is worth £1million or more, this will impact a significant proportion of ordinary working families.”

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