The UK Government is facing growing calls for a major overhaul of stamp duty to boost the housing market and assist more first-time buyers in purchasing their own homes. The Coventry Building Society is the latest influential voice advocating for the reduction or elimination of this tax on property purchases, highlighting the potential benefits for individuals aiming to move houses throughout their lives.
The Coventry Building Society conducted a detailed analysis using HM Revenue and Customs data to demonstrate the adverse effects of stamp duty on the housing market. The findings are concerning, with residential property transactions falling to a four-year low in the early months of 2024. From January to March, transactions dipped below 200,000 for the first time since the pandemic’s peak in 2020, with just 192,500 transactions recorded.
The Historical Context and Recent Trends
During the pandemic years of 2020 and 2021, the government temporarily increased the stamp duty threshold from £125,000 to £500,000, which led to a significant boost in market activity. However, once this “stamp duty holiday” ended, transaction numbers began to decline, reverting to levels not seen since 2011.
Jonathan Stinton, the head of mortgage relations at Coventry Building Society, stressed that while temporary measures like the holiday period helped initially, a more sustainable, long-term reform is necessary. According to him, simplifying the stamp duty system could not only save money for homebuyers but also enhance the overall market’s fluidity.
The Current Stamp Duty Rates
Stamp duty rates vary based on the property’s value. Currently, home movers don’t pay any stamp duty for properties up to £250,000, and first-time buyers are exempt unless their property exceeds £425,000. However, this threshold is set to decrease back to £125,000 by March 2025 for those who are not first-time buyers. The rates range from 5% for properties priced between £250,001 and £925,000, to 12% for those over £1.5 million. Additionally, second home buyers and landlords pay an extra 3% above these rates.
Evolution of Stamp Duty Over Time
Despite the constant rate of 5% for mid-priced homes since 2015, the average house price has soared by nearly 50%, inflating the average stamp duty bill substantially. As a result, a greater proportion of homebuyers find themselves subject to this 5% rate. This trend is only expected to worsen with the impending threshold reduction next year.
Potential Changes and Economic Implications
There are rumours that the government might increase the stamp duty threshold to £300,000 to stimulate the market further. This move could save buyers a substantial amount in taxes and potentially sway public opinion as elections approach. However, such a change would offer little relief to first-time buyers who are already exempt up to £425,000.
Karen Noye, a mortgage expert at Quilter, noted that the steep increase in mortgage rates is starting to impact buyers, and the government’s consideration to raise the threshold might be an attempt to invigorate the market further.
Broader Impacts on the Housing Economy
The current stamp duty structure also affects the rental market by deterring potential buy-to-let investors, leading to a shortage of available rental properties and rising rents. Coventry’s analysis highlighted a significant decline in transactions for additional properties, such as buy-to-let homes, which have dropped by 19.1% in early 2024 compared to the average since mid-2022.
Looking Forward
Jonathan Stinton advocates for a more thoughtful review of the stamp duty system, suggesting that well-considered, long-term adjustments could substantially benefit both the residential and rental sectors of the housing market. The current stop-gap solutions, while providing temporary relief, fail to address underlying issues such as affordability and the needs of downsizers or rental property investors.