Stamp duty changes recently acquired the maximum coverage in the UK media recently. Whether it is print media or audio-visual; the topic was mentioned very frequently because it touches the heart of everyone in the country. It is said that the recent changes will affect more than 98 percent buyers. The change has been made to make it more justified and rational. According to the sources, now onward there will be a gradual change in the rates based on price levels. The idea is to make it similar to the income tax structure because people are more familiar with it. There will be a great thrust to the borrowings in the coming four to five years.
Though various critics feel that it is a move keeping an eye to the upcoming elections, political leaders deny the fact. In Scotland, there are plans to replace stamp duty with a special tax known as the Land and Building Transaction Tax by next financial year. Hence, the new rated will also be implemented from 1st April next year. Since the declaration has been made in The Autumn Statement (it was pre-Budget report in the earlier government), experts say that it is a way of flagging the expenditure plans. Also, it is an effective way of setting out the direction of the country’s finances.
What was the logic behind such a bold step?
Some experts think that a sharp squeeze for the spending on public service is expected from quite some time. There will be some more strict steps taken in the coming years. This decision is one of them. Since new stamp duty structure is a tiered one, property prices following in a specific tier will only attract the corresponding duty percentage. Hence, the increase will not be a substantial one.
One thing is sure that such decisions cause some turmoil initially, but they are good from a long-term perspective. Many people who postponed their buying decision due to huge stamp duties earlier will go for it because of the reduced burden. Many people believe that it is part of a total reformation plan for the realty market in the UK. Government wants to encourage people for spending money.
The current system
There has been a lot of controversies and criticism on the current method of stamp duty calculation prevailing in the country for quite a long time. It is said that successively higher rates on the stamp duty affect the purchase price drastically. It has been referred as “slab tax” sarcastically because of a steep increase in the stamp duty price as soon as the price changes to the next slab.
For example, up to 250000 pounds there is a stamp duty of 1%. Therefore, the buyer pays 2500 pounds as stamp duty. However, even if the price increases by 1 pound the buyer has to pay 5000 pounds because stamp duty rate changes to 3% at this slab. Certainly, it is a huge burden for buyers.
The new stamp duty band
Up to £125,000 : 0%
£125,001 to £250,000 : 2%
£250,001 to £925,000 : 5%
£925,001 to £1.5m : 10%
Above £1.5m : 12%
A typical calculation illustrates the overall impact. Suppose the property costs 500000 pounds. As per the tiered structure, there is no stamp duty for the first 125000 pounds. Up to 250000, there is a duty @2%. For the remaining amount, there will be the duty @5%.
A great thrust to the property market
The new system gives a great relief to high-profile buyers because it doesn’t increase stamp-duty amount substantially. According to financial experts, the proposed structure will encourage people for buying properties causing a positive momentum to the economy. In fact, positive results have been quite evident. Immediately after the announcement, the property rates in some parts of the country came down more than 30K in just a few days. It is an indication that the market is cooling down and giving a positive response to the decision.
As per records, the drop in the average asking price was 3.3 percent reaching a figure of 8700 pounds in the four weeks of this month. It is the biggest fall on a month-on-month comparison. Typically, London prices fell by 30K whereas South East showed a decrease of 15K. Wales was an exception to the trend where the average asking price increased by a few hundred pounds. The trend is quite common during December because of Christmas and winter, but this time it is more related to the recent changes in the stamp duty.
There has been a significant drop in property prices from last two months and after a gap of one month, the property market is expected to get momentum again in January. Due to stringent mortgage regulations, there was a brake in sales. People took more time for analysis and decision making. As banks work on Mortgage Market Review, activities in the market become very slow, if not come to a standstill.
A steady market is always better
According to property market experts, a steady market is always better than a volatile one. When people become value conscious, they think in-depth before spending money. It is good for sincere and serious players who want to do a steady long-term business. It creates more judicious buyers who pay for the real value of the property.
As people expect an uncertainty at political front due to the general election, mortgage rates may get affected due to it. Hence, people do not show an urgency of property purchase and take their own time. Since the average asking price has increased by 7%, it indicates that annual price growth is strong. Prices are expected to moderate by the first quarter of 2015; they will overtake the growth in earnings. Sellers have to work hard to achieve a sale because of slower sped of growth in prices. Rental prices are also expected to show the similar trends. It is also expected that the lower end of the realty market will get a positive thrust with the changes in the stamp duty.
