Stamp duty holiday?
Since April, there have been several calls for a stamp duty holiday to help revive the housing market as lockdown eases.
The physical restrictions during lockdown had a substantial impact on the market, which Zoopla has examined in the latest Cities Index and Rental Market Reports.
The opening of estate agency branches from last week is a welcomed development, allowing activity to proceed, but it makes sense that any sort of a tax cut could further help boost activity in the market.
The government will want to examine the fundamentals of any such proposals carefully.
Our calculations in April showed that housing transactions could be down by 50% this year, which could mean halving stamp duty receipts to £4 billion - assuming house prices don’t change.
How would a stamp duty holiday work?
The theory is that giving potential buyers an effective tax break (by cutting their stamp duty bill to zero), will encourage them to move home.
The ‘holiday’ aspect means there’s an impetus to act because it’s not a permanent change.
There’s an argument that this only brings forward activity that would have happened anyway. But when trying to give the economy a boost, this seems acceptable.
A stamp duty holiday is not only about helping people achieve their goals in terms of housing. It’s also about how important the housing market is to the economy as a whole.
When you move into a new home, you need to organise your finances and utilities.
The act of moving includes other services too. You may want to re-decorate, buy additional furnishings or do something with the garden. All of this supports the retail sector.
This ‘network’ effect on the economy means that the government is keen to encourage housing mobility.
Have there been stamp duty holidays in the past, and did they work?
Yes. And sometimes.
The stamp duty holiday introduced during the recession in late 1991 to 1992 was at the time when the housing market slumped (amid very high interest rates).
The stamp duty rate at that time was just 1%. The threshold for paying stamp duty was temporarily raised from £30,000 to £250,000. The average price of a home was just over £50,000.
Despite this intervention, housing transactions in 1992 were still lower than in 1991 and house prices still fell. But the likelihood is the figures would have looked far worse without a stamp duty holiday.
During the financial crisis in 2008 to 2009, another stamp duty holiday was introduced.
This holiday raised the lowest threshold for paying the 1% rate of stamp duty from £125,000 to £175,000. The rates for more expensive properties were 3% and 4%.
The average price of a home at this point was just under £175,000.
The level of transactions fell by 5% in 2009, but this came after a 44% decline in 2008. It was followed by a 3% rise in activity in 2010.
But some of this can also be attributed to price adjustments and the beginning of green shoots in the economy.
What’s the current stamp duty regime?
In 2014, the method of calculating stamp duty changed. And so did the rates at which this tax is charged (Scotland followed with changes in 2015).
This effectively cut the tax bill on homes worth up to £940,000 (which account for more than 95% of households), but cranked up the charges for more expensive properties.
In 2009, the most expensive stamp duty band was 4%.
This is now 12%, rising to 15% for some buyers and 17% for overseas buyers purchasing in England from next year.
A complete stamp duty holiday today would mean larger savings, but only for some.
First-time buyers purchasing a home in England or Northern Ireland for up to £300,000 will see no change, as they have been exempt from this property tax since 2017.
This helped around 214,000 buyers purchase a home in 2018/19.
In Scotland, first-time buyers pay no stamp duty on purchases on properties with a value of up to £175,000, while in Wales the nil-rate band for all buyers was set at £180,000 in 2018.
So, who’d benefit from a stamp duty holiday now?
Stamp duty may be payable (excluding the first-time buyer exemption) on 85% of all property transactions. But the impact of the tax is not the same across the country. This is because of the wide range in average house prices.
This is backed up by stamp duty receipts data. The data shows that homebuyers and homemovers in London and the South East paid 72% of all stamp duty receipts in 2018/19.
The reasons for this become clear when you look at the stamp duty charges for average property prices across UK regions:
In other words, the average property price in London far exceeds the lowest interest-free threshold for the area.
This is further demonstrated in the stamp duty revenues received by each region.
In London, the South East and the Midlands, the proportion of sales where this tax was not payable was under 5%.
In parts of the north of England, more than 40% of sales were not liable for stamp duty.
In short, it would largely be homemovers in London, South East and parts of the Midlands who would benefit most from a stamp duty holiday.
In the most expensive markets with an international buyer base, the savings could be significant.
The evidence of past stamp duty holidays is that it can boost sales activity overall.