Will stamp duty reforms help first-time buyers?

David Kingman weighs up whether the reforms to stamp duty that Chancellor George Osborne announced in his recent Autumn Statement will make it any easier for first-time buyers to get on the property ladderPound notes house

One of the most significant policy announcements to come out of George Osborne’s recent Autumn Statement was a series of major reforms to stamp duty, the tax levied on purchasers whenever they buy a property. These have already proved popular with many people, as it was often a complaint that the previous system lacked fairness and created distortions in the market. Some have argued that the new reforms should make it easier for first-time buyers to get on the property ladder, but will they in reality?

A progressive system

The key reform which Osborne has brought in is that he has replaced the previous “slab” system with a series of incremental bands that work in a similar way to income tax.

Under the system which is being replaced, the amount of stamp duty anyone who bought a property had to pay was levied as fixed percentage of the whole property’s value, with different categories depending on how much the property cost. At the time of their replacement, the rates under this system were as follows:

  • Up to £125,000 – 0%
  • Over £125,000 and up to £250,000 – 1%
  • Over £250,000 and up to £500,000 – 3%
  • Over £500,000 and up to £1 million – 4%
  • Over £1 million and up to £2 million – 5%
  • Over £2 million – 7%

The crucial difference with the new system is that from now on different rates of stamp duty will apply to different parts of the property’s price. How this new system of rates and bands will work is shown below:

  • Up to £125,000 – 0%
  • Over £125,000 and up to £250,000 – 2%
  • Over £250,000 and up to £925,000 – 5%
  • Over £925,00 and up to £1,500,000 – 10%
  • Over £1,500,000 – 12%

For example, if someone was buying a house that cost £300,000, under the old system they would have paid £9,000 in stamp duty because the property fell under the £250,000–£500,000 band, which meant they had to pay tax of 3% on the whole price. By contrast, under the new system they will have to pay 0% on the first £125,000, then 2% on the next £125,000 and 5% on the remaining £50,000, giving them a total stamp duty bill of £5,000.

The new system is designed to be more progressive, as people buying cheaper properties will pay less on average while those buying more expensive ones will see their stamp duty bills go up. The Treasury’s own estimates suggest that someone buying a property for £275,000 (the value of the average family home) will see their stamp duty bill fall by £4,500, while someone who purchases a house for £2.1 million will see their stamp duty bill rise by £18,750 under the new system.

The reforms have also been designed to remove the distortive effects creating by levying stamp duty in slabs, as this created pinch-points whereby house prices tended to cluster around each threshold.

Will it help first-time buyers?

The main argument which suggests that this new system could assist first-time buyers with getting on the property ladder is that many of them will find it makes buying a property less expensive. According to the latest data from the Office for National Statistics (ONS), the average first-time buyer nationwide paid £182,000 in 2013: under the old system they would have paid £1,182 in stamp duty, whereas now it will only be £1,140. This isn’t a lot, but at the regional level it could have a larger impact: the average first-time buyer in London paid £327,000, so their stamp duty bill will now fall from £9,810 to £6,350, giving them a far more substantial saving.

Set against this, there are two reasons why the changes to stamp duty may actually make life more difficult for first-time buyers. First, they could push up prices now that sellers will have more flexibility to set their prices without having to worry about crossing one of the old system’s bands. Secondly, the move will also lower prices for buy-to-let landlords, enabling them to continue competing with potential first-time buyers for similar properties.

However, the most important fact in all this is that the changes to stamp duty will make no impact for the vast majority of first-time buyers across the UK. This is because of the regional divide in Britain’s housing market – while first-time buyers in London can make a big saving, the average first-time buyers in most of the other regions of the country is below, or only slightly above, the minimum threshold for paying stamp duty (in the North East it is £112,000, for example).

While first-time buyers who are trying to compete in the country’s most expensive property markets may find that they benefit slightly from George Osborne’s changes to stamp duty, much bolder measures are still needed to address the bigger problem with housing affordability across the UK.