The process of buying a house has undergone an overhaul with the wholesale reform of the stamp duty system, with the declared intention of making the system fairer. Before the changes implemented in the Chancellors’ 2014 Autumn Statement, stamp duty was paid at a single rate on the entire price of the property. While 75% of house purchases in England and Wales incurred stamp duty during 2013, this figure rose to 98% in London.
Stamp duty has been modified eight times in the last two decades. Back in 1992, stamp duty was charged at 1% on property sales over £30,000. The threshold was subsequently doubled to £60,000 in 1993, doubled again to £120,000 in 2005, and increased to £125,000 the following year. The rate of stamp duty also gradually increased over time so that, by 2006, properties worth more than £125,000 were taxed at 1% while properties worth more than £250,000 were taxed at 3%. Duty of 4% was charged on properties over £500,000, 5% on properties over £1m, and 7% over £2m.
However, the coalition government has now scrapped this ‘slab’ structure and introduced a new tiered system, similar to income tax, in which higher rates of duty are charged in incremental steps. No stamp duty will be paid on the first £125,000 of a property’s cost; 2% will be payable on the amount between £125,001 and £250,000. 5% will be payable on the amount between £250,001 and £925,000, and 10% will be charged on the amount between £925,001 and £1.5m. Anything above £1.5m will incur stamp duty of 12%. As a result, 98% of house-buyers will pay a lower rate of stamp duty than before, and only those buying properties valued at more than £937,000 will pay more. Under the old system, for example, a house costing £275,000 would incur stamp duty of £8,250 – however, under the new rules, the buyer will pay stamp duty of only £3,750, saving £4,500. The new system of stamp duty will only apply in Scotland until 1 April 2015, when it will be superseded by Land & Buildings Transactional Tax.
Looking ahead, Halifax expects house prices to increase by between 3% and 5% in 2015. This slowdown in growth will be exacerbated by expectations of higher interest rates in 2015 and political uncertainty surrounding the General Election. Nevertheless, the bank believes economic expansion should provide support for housing demand, bolstered by stronger growth in real earnings.
Steve Martin is Partner at Watsons Solicitors.