How do the stamp duty changes affect me?

I recently listened to a radio panel debate regarding the week’s news.  One of the topics debated was the proposed ‘Sugar Tax’.  Most panellists thought this was a good idea to help in the battle against childhood obesity.  One panellist disagreed stating the UK already had the most complicated taxation system in the world.  According to her, the HMRC tax code handbook now runs to nearly 7,000 pages!

Recent changes to Stamp Duty Land Tax, the government levy on buying property, has further added to this complication.

Having been a mortgage adviser for over 15 years, it comes as no surprise when people use out of date information to calculate the cost of the Stamp Duty due on their purchase.

The first major changes happened in December 2014 when sweeping changes were announced. Before the changes, 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;  £250,001 and £500,000 – 3%;  £500,001 and £1m – 4%;  £1m and £2m – 5%;  and above £2m – 7%.

This “slab structure” was perceived as unfair, as there was a major jump in the cost of the tax when a banding was crossed.  For example, if you purchase at £250,000, the stamp duty was £2,500. When the purchase price increased by just £1,000 to £251,000; the stamp duty suddenly jumped to £7,530.  This distorted the property market and was seen as unfair.

The December 2014 changes made Stamp Duty work in a similar way to Income Tax.  The slab structure was scrapped.  There is still no tax on purchases up to £125,000.  Above that, the following bands apply:  Between £125,001 and £250,000 the rate is 2%,  £250,001 and £925,000 -5%,  £925,001 and £1.5m the rate will be 10% and above £1.5m the rate will be 12%.

Under this method of calculation, if you purchase at £251,000, the Stamp Duty is £2,550.

It could be argued that there were two unintended consequences from these changes.  Firstly, property prices have increased significantly as the distorting cap on prices slightly above the different stamp duty levels has been removed.

Secondly, the reduction in Stamp Duty at certain levels lowered the cost of purchasing Buy to Let property.  This further inflated property prices at a time of high demand and low supply.

To counter these unintended consequences, from April this year new rules will apply to those purchasing a new second property.  This will affect those buying a second home, a Buy to Let property or a holiday home.  The Chancellor really doesn’t want you to do this, and to show you he means business, he has introduced the new Second Property Tax.

The Stamp Duty system has now become incredibly complicated. It used to be very easy to work out the duty payable.  Now, we rely on online calculators such as www.stampdutycalculator.org.uk

As we move into the spring and the property market is at it’s usual ‘full throttle’, it will be interesting to see if there are price adjustments reflecting these changes, or whether it is the UK property market will continue to move forward.