The Property Planet Podcast
I was a special guest on The Property Planet podcast, in this episode, I discuss the ever-increasing complex world of Stamp Duty. We discussed the issues...
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The term “stamp duty” refers to a tax that must be paid when purchasing a residential property or piece of land in England or Northern Ireland that costs more than £125,000 – or £300,000 for first-time buyers. Those who have not purchased a dwelling before also pay reduced SDLT on property costing not more than £500,000.
The standard rate of SDLT plus 3% is levied on second homes. This has previously been referred to as the Higher Rate for Additional Dwellings or HRAD.
This particular tax received the name “stamp duty” because, historically, the documents involved were stamped when the relevant amount was paid.
Stamp duty raises around £11.6 billion annually for the UK Treasury. Since the COVID-19 lockdown, quarterly SDLT transactions and receipts fell quite a bit, but are now recovering.
Since 2017/18 revenue generated from SDLT receipts has been slowly decreasing.
As of the second quarter of 2018, there were no increases in receipts for SDLT since the third quarter of 2015 – almost three years ago. This stagnation occurred in spite of the top rates for this particular tax increasing from 7% to 12% and the introduction of the additional 3% for additional dwellings in 2016.
Changes made in 2016, including the additional 3% for additional dwellings, increased tax revenue by £600 million in 2016/17, up from just £30 million in 2015/16. These changes continue to generate extra revenue for the UK, and is expected to generate £880 million extra in 2020/21.
Between 2016 and 2017, properties in the highest tax band accounted for less than 1% of overall transactions across England and Northern Ireland. However, they were the subject of a fifth of SLDT receipts.
Twenty years ago, owners of mid-range properties would pay no more than £1,000 of stamp duty across the country. However, this figure has now increased twelve-fold for properties in London and four times over for the rest of the country, with the gap only promising to widen still.
Overall, throughout the last forty years, SDLT receipts have followed a very gradual upward trend, nosediving during times of recession and subsequently recovering to continue their climb.
Between 2023 and 2024, SDLT receipts in England are predicted to rise to close to £16 billion with inflation taken into account – that’s around £14 billion in today’s market.
The most recent findings show that as of the fourth quarter of 2020, SDLT transactions were 43% higher than in the third quarter of 2020, and 19% higher the same quarter of 2019. This is likely influenced by the SDLT holiday that was announced on July 8, 2020, which temporarily increased the nil rate band for residential property purchases from £125,000 to £500,000 from 8 July 2020 until 31 March 2021.
The Stamp Duty Holiday certainly has had an effect on the home buyers. In September of 2019, 16.1% of respondents said that Stamp duty costs would deter them from buying a home. After the pandemic and the halting of stamp duty, this number decreased to just 4.68% in September 2020.
London generates the largest portion of SDLT revenue in England; it produces around 38% of total receipts annually, which equates to around £4,400 million. It’s also the region that has seen the largest growth in receipts over time, most likely due to the considerable differences between inflation within the city’s housing market and that of the rest of the country, and also the fact that London is home to the largest concentration of property transactions worth £1 million or more – meaning that it is the area most significantly affected by increases in SDLT rates that focus on properties of this value.
Receipts for residential transactions have stayed the same for most regions between 2018/19 and 2019/20, apart from an increase of 3% in the North West and 5% in the North East and Yorkshire & The Humber regions.
Non-residential transactions have fallen across all regions apart from in Northern Ireland and the East Midlands, which have seen negligible differences. The sharpest decrease was seen in the West Midlands, with a by 6%, from £645 million to £605 million.
Westminster’s local authority sees the most significant value of SDLT receipts from residential transactions at around £535 million, representing approximately 6.4% of the whole country’s total, while the parliamentary constituency with the largest receipts for residential SDLT is currently Cities of London and Westminster, which sees £410 million worth of receipts – 4.9% of all residential SDLT receipts combined.
When it comes to non-residential transactions, the local authority of Westminster also tops the list, with transactions equaling £255 million, representing 8% of all non-residential SDLT receipts.
In 2019/20, First Time Buyers’ Relief (FTBR) relieved an estimated £541 million in total for first time buyers, across 222,700 transactions.
Between 2019 and 2020, residential transactions in London, the South East, and the East of England tied for the highest percentage (25%) of FTBR claims. The North East claimed the lowest percentage of FTBR at just 14%.
During this time, the average amount of relief awarded per transaction equated to about £2,400, with London sitting at the upper end of the spectrum with an average of £4,300 and Northern Ireland at the bottom with £900. These amounts tend to directly reflect the house prices in each region.
Since its introduction, the estimated total amount of First Time Buyers’ Relief up to the second quarter of 2020 is £1,294 million, with over 540,900 claims made.
The number of additional dwellings transactions, or second homes, remained stagnant in 2019/20, representing 230,300 transactions, compared to 230,600 in 2018/19. During this same period, HRAD receipts (Higher Rates on Additional Dwellings) amounted to £3,820 million – just £10 million more than in the previous year. Of this, £1,630 million came from the additional 3% on second homes.
23% of all residential transactions were for additional dwellings, as were 45% of residential receipts, having increased just 1% from 2018/19.
Purchasing of second homes and additional properties seems to have slowed down since 2015 – likely as a direct result of the implementation of an additional 3% on top of the standard SDLT rate for these types of transactions.
This number has dipped, but has slowly been increasing since the residential SDLT holiday. Since the first quarter of 2018, HRAD transactions continue to make up about a third of all liable transactions. In the third quarter of 2020 a total of 54% of liable transactions were HRAD, while in the fourth quarter of 2020 the figure again rose to 55%.
There is both a higher proportion of additional dwellings valued at over £1 million and a higher proportion valued at under £250,000 that can be found across other residential transactions, most likely reflecting on the activities of diverse types of property investors.
In 2019/20, 3% of additional dwellings transactions were valued over £1 million, accounting for 36% of HRAD receipts of 21% of the stamp duty surcharge receipts. 61% of additional dwellings transactions were valued below £250,000 in 2019/20, accounting for 24% of residential SDLT transactions.
Currently, 9% of residential properties and 14% of non-residential properties in London are priced above one million pounds, while fewer than 1% of homes and 6% of non-residential properties in Northern Ireland are found within this band. Within both of these sectors, there is a clear gradual decline in the number of properties priced below £250k year on year.
Changes in the market and to the way SDLT works mean that more and more receipts are coming from higher-priced properties.
Between 2017 and 2018, 2% of properties sold for over £1 million made up around 31% of SDLT revenue within the residential market.
Properties valued at £250,000 or less accounted for 59% of all transactions, and 11% of the total SDLT receipts, whilst properties over £1 million accounted for 3% of transactions and 44% of total SDLT receipts.
SDLT has now been found to be the second most important influence on homeowners who are choosing whether to downsize. Its significance for individuals making this decision has increased exponentially when compared against figures from a decade ago.
The idea of Stamp Duty itself dates back to Italy in the 17th Century, but the system as we currently know it began to take shape in the 1650s. The tax has also been applied to other areas, such as apprenticeship costs, clothes and gambling equipment.
Stamp Duty Land Tax (SDLT) replaced Stamp Duty as the tax paid on property transactions in December 2003 in the Finance Act of that year, when the rules for residential and non-residential properties were also separated.
Within just over three years of Gordon Brown’s appointment as Chancellor of the Exchequer, the top rate of SDLT had risen to 4%. Prior to his entering this post, the amount had remained between 1% and 2% for forty years. With George Osborne claiming the position, the amount increased to 12%, and the additional 3% for HRAD was introduced.
These changes have meant a 1,300% increase in stamp duty land tax in under two decades. In 2011, Osborne also introduced a top rate of 5% on properties worth over £1 million. He went on to introduce a 7% increase for properties worth over £2 million, then revised the system so that it became a graded system with an increase to 12% for portions of property worth over £1,500,000.
By to let properties and second homes became subject to the current 3% surcharge in April 2016, meaning that the highest possible SDLT bracket sees second homes facing a 15% rate overall.
In March 2020, Chancellor Rishi Sunak introduced the next proposed step, the implementation of an additional 2% surcharge for non-UK resident homebuyers in England and Northern Ireland, which is intended to help control the rise of house prices. It has been suggested that the proceeds of this surcharge will be used to tackle the growing issue of rough sleeping – something the government has committed to ending by 2027.
The proposed surcharge would not only affect home buyers from overseas, but also UK-resident companies controlled by overseas shareholders. It would not affect crown employees working abroad, and the surcharge amount paid by any overseas home buyer who subsequently moves to the UK would be refunded.
In July 2020, the government published the draft legislation, which is expected to be introduced in the 2020/21 Finance Bill and implemented from 1 April 2021.
With the COVID-19 pandemic wreaking havoc on the economy and housing market, only time will tell what changes will be made to SDLT to accommodate this. Possibly a delay of the overseas surcharge, or an extension to the Stamp Duty Land Tax holiday from March could be considered, but we’ll have to wait until Budget 2021 for more information.