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Stamp duty bills cut for homebuyers

Osborne kills off hated slab system - with promise those paying under £937,000 will save money

  • Stamp duty to now be levied progressively like income tax
  • New bands step up to highest level of 12% above £1.5million
  • Those buying a £300,000 home will see £4,000 cut from stamp duty bill
  • Buyers of £600,000 homes will also save £4,000
  • Biggest reform since Gordon Brown ushered in higher stamp duty bands
  • If £250k band had moved with house price inflation it would stand at £787k

A drastic reform to stamp duty announced by George Osborne will see the end of the hated slab-style system that hit buyers with huge bills for moving home.

Stamp duty bands were radically rejigged in the Autumn Statement and it will now only be levied progressively above thresholds, in a similar way to how income tax works.

Previously buyers paid the percentage above thresholds on the entire purchase price - creating a situation where tax bills rocketed from £2,500 to at least £7,500 when buying a home costing more than £250,000.

Chart 1.14

Soak the rich: The chart above shows who will pay what after the stamp duty changes. Where the dark green line is above the light green line homebuyers will now pay less - where it is below it, they will pay more.

Chancellor George Osborne said the reformed stamp duty will kick in from midnight tonight and that 98 per cent of homebuyers will pay less tax thanks to the changes.

Only those buying homes costing more than £937,000 will face a bigger tax bill, he claimed.

Bands are now 0 per cent up to £125,000; 2 per cent to £250,000; 5 per cent to £925,000; 10 per cent to £1.5million and 12 per cent above that.

Previously they stood at 1 per cent above £125,000; 3 per cent above £250,000, 4 per cent above £500,000; 5 per cent above £1million and 7 per cent above £2million.

Anyone in the process of buying a home who has exchanged contracts but not yet completed will be able to choose which system they pay under, to ensure the change does not sink their purchase and trigger property chains collapsing around the country.

Some upmarket London estate agents whose buyers will be hit hardest by the changes reported a rush to exchange before midnight, to lock in at lower rates. Ed Mead, of Douglas & Gordon, said on Twitter his office had seen seven panic exchanges so far, with one buyer potentially saving £43,000.

The change to stamp duty is a victory for most buyers, who will fall below the £937,000 break even level.

This is Money has long campaigned for a change to stamp duty and the removal of the slab-style system, we have also argued that thresholds should be linked to house price inflation. The chart below highlights where the £250,000 threshold would now stand if it this had happened.

The change is the biggest reform of stamp duty since Gordon Brown ushered in higher rate bands when he became Chancellor in 1997.

Before that point stamp duty had been levied at a flat 1 per cent above a threshold of £60,000.

Brown initially launched a 1.5 per cent charge above £250,000 and and 2 per cent charge above £500,000

By 2000 he had hiked these to 2 per cent and 4 per cent, respectively, as he cashed in on rising house prices and the property boom.

But despite huge house price inflation since 1997, the higher and top stamp duty thresholds never moved.

Had they kept pace with property prices as measured by the Nationwide index, the £250,000 threshold would today stand at £787,500 and the £500,000 threshold would stand at £1,575,000.

Despite his attack on the slab-style system in today's Autumn Statement, George Osborne himself, also used it to impose extra stamp duty on homebuyers. He ushered in a 5 per cent band above £1million and 7 per cent band above £2million.

Why did stamp duty need reforming?

This is a move to alleviate the stamp duty trap that saw families hit with huge tax bills for buying a home.

These were triggered by the slab-style system - imposing the tax on the entire purchase price - combined with the upper stamp duty bands, especially as successive governments failed to raise these with house price inflation.

This hit those buying homes between £250,000 and £500,000 hardest, as it was here that the amount levied leapt from 1 per cent to 3 per cent.

That meant someone buying a £350,000 home would face a £10,500 tax bill - a tall order on top of the need to find a deposit and pay other moving expenses, such as estate agent fees, solicitors' bills and mortgage charges.

Who will pay less?

Under the new system anyone buying a home costing under £937,000 should pay less or the same, Treasury figures show.

Those buying a £200,000 home will pay £1,500 instead of £2,000. The big win though is for those previously caught in the 3 per cent tax trap, someone previously hit with an £8,250 bill on a £275,000 home will now pay £3,750.

Meanwhile, those buying a £600,000 home will now pay £20,000 in tax, compared to £24,000 before.

The Treasury's chart shows an odd sweet spot between £1million and about £1.25million, where people will also pay less.

Who will pay more?

Buyers at the top end will pay the price for the reform.

Someone purchasing a £1million home will pay £43,750 instead of £40,000, but someone buying a £2,000,000 home will pay £153,750 rather than the current £100,000 levied just before the 7% threshold kicks in.

Ben Southwood, head of research at the Adam Smith Institute, said: 'The old stamp duty slab system was one of the worst taxes Britain had, and we welcome the Chancellor's radicalism in abolishing it, rather than simply tinkering around the edges.

'According to the best economic research, raising £1 through stamp duty imposes £2 to £5 of cost on the economy.Though it will still, as a transactions tax, cost the economy heavily, the reform will reduce the economic cost substantially.

'This is a tax cut for the squeezed middle that will make a big difference to a lot of people's lives. Politically, it could be a game-changer.'

Published on 08 December 2014

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