How the new stamp duty cut will affect homebuyers

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Finally, some good news in the property market, as Chancellor Kwasi Kwarteg announced a decision had been made to raise the level at which homebuyers have to pay stamp duty. 

First-time buyers will no longer have to pay stamp duty on properties up to £425,000, making property buying slightly more affordable for those aspiring to own their first home. Properties valued at up to £250,000 will also now be tax-free for those wishing to purchase a second home.

What is Stamp Duty?

Simply put, stamp duty is a tax that has to be paid by those wishing to purchase a residential property or piece of Land in England and Northern Ireland. It is calculated based on the overall value of the property you are buying. 

Up until now, homebuyers paid no stamp duty on the first £125,000 of a home purchase. Those wishing to purchase a property priced above said amount but below £250,000 were required to pay a 2% tax contribution on anything above £125,000. If your property was valued between £250,000 and £925,000, your stamp duty contribution would have been 5%. This applied to both freehold and leasehold properties. 

First-time buyers on the other hand, qualified for first-time buyer's relief which saw thresholds slightly higher than those purchasing an additional property. If you were buying a property for the first time, you were only required to pay stamp duty on homes valued at £300,000 or above, in which case your stamp duty contribution would have been 5% as long as the property value didn't exceed £500,000.

Stamp duty tax could be paid upfront or sometimes added to the overall value of your mortgage - however, this would impact your loan-to-value ratio.

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How is Stamp Duty changing?

The threshold for Stamp Duty tax has been raised for those residing in England and Northern Ireland. Aspiring first-time home buyers will now no longer be required to pay stamp duty on properties priced up to £425,000, adding a whopping £125,000 to the previous threshold. 

This will effectively improve homebuyers' affordability, potentially offering thousands of savings to those wishing to purchase their first home. The UK house price index reports that the average property price as of April 2022 in England was £299,249, meaning that the average first-time homebuyer in England will not be required to pay stamp duty at all. 

Those purchasing an additional property will see stamp duty thresholds almost double, with the new minimum value requirement increasing from £125,000 to £250,000. Anything above £250,000 will then be taxed at 5%.

This change will also see almost a third of homes (33%) currently for sale across England, completely exempt from stamp duty. This number would have been equal to around 7% with the previously lower stamp duty benchmarks.

What about Scotland and Wales?

Scotland and Wales require citizens to pay a similar form of property tax, however, the rules differ from the ones we see in Northern Ireland and England. In Scotland, this is called land and buildings transaction tax, and only has to be paid on properties valued at £145,000 and above. 

Meanwhile, in Wales, the fee is called the land transaction tax, with a minimum threshold of £180,000. Both Scotland and Wales will be reviewing their property tax systems individually and are not subject to the recent changes that have been incorporated across Northern Ireland and England. 

Why are stamp duty thresholds increasing?

The government has increased the stamp duty threshold in order to help people get on the property ladder, as property prices continue to surge amid the cost-of-living prices. With the average property price in the UK now being 16.4% higher in July 2022 than the same time last year, young professionals and families are finding it increasingly difficult to get onto the property ladder.

It is stated that around 40% of young adults will struggle to afford to buy one of the cheapest homes in the area, even with a 10% deposit. According to the Institute for Fiscal Studies, house prices in England have risen by 175% over the course of two decades, whilst the average pay for people aged 25-34 years old has only increased by 19% over the same period. 

Incorporating government schemes, such as the Help-to-buy scheme which allowed homebuyers to purchase a property with a 5% deposit, and the Help to buy ISA account which offered a financial contribution to people's deposit savings aimed to make home ownership easier and more accessible to the average UK citizen. 

As much as these incentives have now expired, the government is still actively trying to invest in new ways that will take some financial pressure off first-time buyers and allow them to purchase their first property.  

In the process of buying a property? This is how you'll be affected.

If you have started your mortgage journey before the 23rd of September and have already been granted a mortgage and paid your deposit, unfortunately, there is no going back. However, those who have secured a sale on a property before that date but are yet to go through the conveyancing stage will now be able to benefit from the stamp duty cuts.

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