In his economic statement of earlier today, Rishi Sunak announced a temporary cut to Stamp Duty Land Tax (SDLT).
This will take effect immediately and will last until 31st March 2021. This is designed to give the housing market and the wider economy a much needed boost with the economy having contracted faster in the last three months than in the last 18 years.
Back in the height of lockdown the RICS was very vocal in lobbying the Treasury to relax SDLT, conscious of the crippling effect that the lockdown would have on the housing market. The Government has paid heed to that and is seeking to restore confidence to the housing market as part of wider measures to boost Britain.
The threshold for paying SDLT will be raised to £500,000. This will exempt the first £500,000 of the purchase price from SDLT. There is no price cap on this and therefore the benefit will be enjoyed by buyers of all homes – including those with a price tag of over £500,000. This means a saving of up to £15,000 for each buyer. The average SDLT bill will fall by £4,500. Thousands of buyers will pay no SDLT at all as the nearly 90% of property transactions are for under £500,000. Today’s announcement will be positively received by the electorate – or at least those in England and Northern Ireland as different rules apply in Scotland and Wales.
So the new SDLT calculation looks to be as follows – 0% on the first £500,000, 5% on the portion from £500,000 to £925,000, 10% on the portion from £925,000 up to £1.5 million and then 12% on the balance. So there is still a top rate of 12% despite the forecast that that would be lowered.
As with most changes to SDLT the change takes place immediately. We have been a lot more used to SDLT increases than decreases and this change is almost unprecedented. Conveyancers will recall having to exchange contracts in a matter of hours in order to avoid an increase. Now we have the joy of telling clients who have exchanged contracts but are yet complete the happy news that their SDLT bill will now be reduced. “Yippee” texts one client who is due to complete at the end of this week on a renovation purchase. £15,000 goes quite far at B&Q. She is further delighted at the £5,000 that she can get from the Government to help make the property more energy efficient thanks to the Green Homes Grant Scheme also just announced.
Additional residential property
Guidance released by HMRC confirms that the 3% surcharge payable on purchases of an additional residential property which does not replace their main dwelling remains. But there is still a saving as the new threshold for the underlying rate still applies. For example the SDLT bill on a second home purchased for £500,000 is halved from £30,000 to £15,000. Buy to let investors will be relieved that they are not being deprived of a holiday. Anything else would have been pretty cruel. The buy to let market still needs support.
No mention has been made of the additional 2% rate for overseas buyers announced in March. Overseas buyers should assume that that will still be introduced in April 2021. The continued weakness of sterling, low interest rates and a more palatable political landscape will no doubt result in a surge of investment from overseas. That may well grind to a virtual halt in Q2 2021.
But is the housing market in need of a boost?
It has been widely reported by estate agents that the housing market is booming since it was reopened in mid-May. The boom is largely due to pent-up demand from transactions put on hold over lockdown. But there are also reports of an increase in new instructions. There has been particular demand for country homes, the market for which is experiencing a major price growth. Despite the purported increase in demand, prices are still under pressure and lenders are cautious about lending in a volatile market particularly where the loan to value is over 80%.
That still makes it difficult for a first time buyer to find a sufficient deposit to proceed with a purchase. If the SDLT holiday results in an increase in prices then the financial benefits of the holiday are quickly lost. Prices need only rise by £15,000 for the maximum benefit to be lost.
There are contradictory messages about prices. Whilst agents report large increase in the volume of business which should put upwards pressure on prices, the Halifax has reported price falls for the fourth consecutive month in June – the first time that has happened since 2010. The Nationwide reported a 1.4% price drop in June. In May Knight Frank predicted a 7% reduction in prices this year. The Bank of England prediction was worse than that. Prices for “best in class” will always be strong. Smaller properties with no outside space are likely to be more susceptible to a price chip. This includes a lot of properties in Central London. Greedy sellers may find themselves waiting for a sale.
There have been predictions of a property slump in the Autumn. Presumably those rumours will be adjusted to defer any slump to the Spring when the SDLT holiday ends and when overseas investment is halted when the 2% surcharge takes effect.
It will be interesting to see how the economists react to today’s announcement.
Some of the more libertarian think tanks and other commentators on the economy had been encouraging the Chancellor to be bold and scrap SDLT altogether – a move that is popular among some Tory MPs. Following today’s announcement that seems unlikely.
SDLT is a good source of revenue and from a cashflow perspective it is excellent. It is payable within 14 days of a transaction and is collected by conveyancers. It currently produces £12 billion a year according to HMRC which is approximately 2% of the Treasury’s receipts. However the SDLT holiday will reduce those receipts.
The SDLT holiday will certainly help purchasers but that does not put money in the pockets of the wider electorate. That requires cuts in income tax and national insurance contributions – and there has been no hint of those in today’s announcement. The demands on the taxpayer will only increase as there are more measures to boost the economy to pay for. Somehow that shortfall in SDLT receipts has to be met.
The Bank of England and the Office of Budget Responsibility both project significant job losses – although hopefully today’s announcement of other measures to boost the economy will reduce the quantum of those. Consumer confidence may improve but it will remain subdued if potential buyers are put off by the basic fear of not being able to pay a mortgage.
However the reduction of VAT from 20% to 5% from 15th July for most parts of the hospitality industry including restaurants, café and pubs,plus the announcement of the novel “Eat Out to Help Out” scheme for August should put a smile on everyone’s face.
Full details of the measures announced in the Chancellor’s statement can be found in an update from our Tax team.
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