Reduced Stamp Duty: What It Means for Investors

On 8th July 2020, the Chancellor of the Exchequer, Rishi Sunak, announced an immediate reduction in stamp duty, here we are going to explain this reduction. Operating until 31st March 2021, the new arrangements mean the suspension of duty on the purchase of any home in England or Wales, valued at up to £500,000.

For property investors who may be eyeing a new acquisition, the stamp duty reduction could deliver an important saving on investment properties, although it’s important to note that the 3% stamp duty surcharge will still be payable.

Reduced Stamp Duty Means Tax Savings for Investors: Yes or No?

Whether or not the tax holiday will benefit individual investors depends on the value of the property purchases they might be considering between now and March 2021.

Stamp duty is different on investment properties as previously, residential properties with a value of below £125,000 were exempt from basic stamp duty anyway, so an investor buying a small unit below this threshold would only have had to pay the 3% surcharge. Consequently, the new arrangements don’t offer any cost reduction for those who would be buying at below £125,000 because the tax bill would still be the same. However, for those buying higher-value properties, the savings could now be considerable due to the stamp duty reduction.

Taking the average price of a UK home as a baseline, the UK Government calculates that the cost of stamp duty will typically fall by £4,500 per purchase for so long as the tax holiday is in force. The actual saving will depend on the price of the individual property, of course; the tax reduction will be most significant when it’s applied to higher priced homes, often in expensive regions such as the South East. It will tend to be much less significant when applied to smaller, more affordable units in the higher-yielding markets further north.

Nevertheless, at a time when landlords may be concerned about Covid-19 and the profitability of their investments, any prospect of stamp duty cost reduction must be welcome.

The Impact of Reduced Stamp Duty - Explained

Many industry commentators have been reporting that the stamp duty holiday has had an immediate and positive effect.

Speaking shortly after the Chancellor’s announcement, Rightmove’s property expert Miles Shipside said: “This move will help to keep the wider economy moving… keeping the current momentum going will help prevent destabilising falls in property prices as unemployment grows, and enable a quicker economic recovery.” He also hinted at possible upward pressure on house prices, saying: “What we could see now is people rushing to get a price agreed before some sellers put their prices up in the hope that people will be able to pay more because of the stamp duty savings.”

Also on the 8th July, Paragon Bank’s Managing Director of Mortgages, Richard Rowntree, said: “We welcome today’s announcement by the Chancellor. Whilst we would have liked to have seen the 3% surcharge for buy-to-let properties and second homes also removed for transactions below £500,000, we recognise that the stamp duty holiday will lower landlords’ overall purchase costs, reducing the amount of stamp duty they pay from 5% to 3%. This could lead to an increase in supply of private rented property in regions that most need it.”

These early predictions of a much-needed boost to the market appear to have been realised. For example, an article in Peer to Peer Finance News (dated 24th July) noted that “property lenders have reported a boom in demand in the first weeks since the chancellor raised the stamp duty threshold.”

Similarly, on 28th July, ThisIsMoney reported that “Slashed stamp duty, better mortgage deals and new tax benefits all mean landlords are flocking back to the market.” The company also observed that the property portal Zoopla had “recorded a 15% rise in investors looking to buy homes.”

The same article quoted a spokesperson from the buy-to-let finance specialist OneSavings Bank, who said: “For an area of the market that has seen tightening regulation and increased taxation over recent years, this is welcome news, and our teams have already reported an increase in interest.”

Raj Dosanjh, founder of the lettings agent comparison website, Rentround, voiced a similar opinion. He said: “The stamp duty holiday has brought a flood of positivity across the property market. The increase in the number of comparisons run on our platform indicates landlords are looking to add to their portfolios, or that a new wave of landlords are looking to enter the market.” 

Stamp Duty Reduction Regional Differences

Market activity certainly appears to have been invigorated, and many sources agree that property investors have been quick to take advantage of the new stamp duty reduction tax regime. However, the benefits have not been uniformly felt. On 27th July, Zoopla published the results of its latest House Price Index, which showed that average values had risen 2.7% year on year, despite all the disruption that 2020 has witnessed. Its accompanying article noted that:

“The biggest change in the market, spurred by the Chancellor’s announcement of a stamp duty holiday … has been seen in London. Sales jumped by 27% in the weeks after the change. Given the higher average house prices in London and the South East, these are where the largest benefits from the stamp duty holiday will be felt. The stamp duty holiday will continue to support demand in these higher value markets.”

There is an obvious logic to this: the stamp duty reduction clearly delivers bigger savings on more expensive properties. However, as Lettings Agent Today reported in an article dated 23rd July, other popular investment destinations are also seeing significant benefits:

“The stamp duty holiday has spurred existing and would-be landlords to search for new properties to invest in and agents to manage them. Landlord searches … have risen by 21% per cent in the two weeks since the announcement by Chancellor Rishi Sunak, and larger numbers of buyers are new conducting due diligence activities on prospective buy to let units... The trend is across England in general but is seen particularly in Manchester where searches increased by 31%, followed by East London which had a 27% rise.”

Stamp Duty on Higher-Priced BTL Properties

£500,000 is a high threshold by historical standards and estimates suggest that the new arrangements should benefit between 80% and 90% of those engaged in domestic transactions. However, investors with interests in larger buy-to-let properties and/or those in more expensive markets such as London and the South East may well entertain the possibility of buying even higher-priced units. Beyond £500,000, a tiered stamp duty calculation applies, and this is summarised in a table on the Gov.UK website. It lists the property value bands and their respective taxable rates as follows:

  • 0% payable on properties with a value between £0 to £500,000*
  • 5% payable on the next £425,000 (i.e. the portion between £500,001 and £925,000)*
  • 10% on the next £575,000 (i.e. the portion between £925,001 and £1.5m)*
  • 12% on any portion above £1.5m*

(* Note: across all values, a 3% surcharge is still payable by investors.)

Property Taxes in Scotland and Wales

It is worth remembering that the Chancellor’s announcement on stamp duty only applies to properties in England and Northern Ireland. However, since 8th July, similar changes have been introduced in other parts of the UK.

Before the new amendments, the thresholds for paying tax on property transactions stood at £145,000 in Scotland and £180,000 in Wales. However, those have both now been raised to £250,000. The revision came into effect on 15th July in Scotland, and on 27th July in Wales. Given that the average price of a Scottish property was £178,991 in 2019, it’s estimated that around 8 in 10 domestic home buyers will now pay no Land and Buildings Transaction Tax (LBTT) at all.

The rules and tax rates on the purchase of second homes vary by country. A recent article by MoneySavingExpert provides some examples of how the new tax arrangements could affect total purchase prices in England and Northern Ireland, Scotland and Wales.

In any event, the fact that the Scottish tax holiday does not apply to property investors has led some to suggest that the changes to stamp duty could change the balance of the UK buy-to-let market. The argument is that they could make properties in England and Wales considerably more attractive to landlords than equivalent properties north of the border.

In an article in the Scottish Financial News, David Alexander, joint MD of the property management business Apropos, said that investing in the Scottish property market could now cost up to £26,250 more than in England, on property sales valued at £500,000. Since many homes in city markets such as Edinburgh are regularly valued at above half a million pounds, this disparity could have important repercussions. The article notes:

“In Scotland, the threshold for paying no tax for homebuyers was only increased to £250,000 and does not include second home buyers, property investors or landlords; and charges are already higher north of the border. The choice of buying in Scotland, therefore, becomes much less attractive for these buyers compared to their English and Northern Irish counterparts.”

Broader Economic Impacts of Stamp Duty Reductions

It is worth noting that the changes to stamp duty have always been about more than just reinvigorating the housing market. The Covid-19 pandemic has hit the wider economy very hard and, for the UK Government, property is only one consideration amongst many. Nevertheless, it clearly regards the stamp duty holiday as a useful tool for stimulating activity.

The overarching goals of the stamp duty arrangements all relate to the UK economy in general. The stamp duty reductions help to put more money in ordinary people’s pockets and thus, they help to stimulate consumer spending and business investment at a time when such increased economic activity is greatly needed.

Reporting on 8th July, immediately after the Chancellor’s announcement, the BBC questioned two industry commentators on precisely this issue. It quoted Eric Leenders, managing director of personal finance at UK Finance, who said that the new rules on stamp duty reduction “should give a welcome boost to the housing market and in turn, have positive knock-on effects for the wider economy."

Similarly, Jamie Ward, head of stamp taxes at PwC said that "The stamp duty holiday might have a positive indirect impact on a long list of related industries, such as house builders, conveyancers, estate agents, finance and insurance providers, house movers, and furniture and garden retailers.” 

On 27th July, Property Reporter magazine featured an interview with prime property mortgage provider, Butterfield Mortgages, whose spokesperson said:

“The logic behind all tax breaks is that it spurs consumer activity, redistributes wealth and helps accelerate a rise in national productivity levels. By reducing the costs involved with both investing and spending, a tax break such as this (stamp duty) holiday is aiming to accomplish all three of these objectives at once.”

The article also notes that the same tax relief stamp duty reduction instrument has been used before, in September 2008, in an effort to reduce the economic effects of the global financial crisis. Then, the new system raised the lower exemption threshold from £125,000 to £175,000. It ran until 2009 and produced an estimated 8% increase in housing transactions.

Already, it seems beyond doubt that the stamp duty holiday is having a similar effect, and many would argue that it hasn’t come a moment too soon. With Covid-19 still a definite presence in the economy and the possibility of a hard Brexit looking ever more likely, the UK economy still has some rocky waters to navigate. There are widespread predictions of a short-term fall in average property values, which are expected to occur in the last quarter of 2020, but the reduction of stamp duty could well help to diminish the worst impacts.

As Rightmove’s Miles Shipsides implies, the reduction in stamp duty could have a potentially inflationary effect. It could encourage prospective buyers to raise their aspirations somewhat when they realise that their budgets can now go considerably further. In other words, it could fuel a small shift in demand towards higher quality, higher priced properties. Moreover, in anticipation of this, vendors might calculate that they can afford to raise their asking prices, confident that without the burden of stamp duty, buyers can better afford to pay.

In either case, the upward pressure on prices should help to cushion the collective blows of Covid-19 and a no-deal Brexit. Few commentators expect these measures to be enough to counteract all the negative effects of a year of lockdown and lost productivity, but they are still forces that are working in the investor’s favour.

Looking back at recent history, it’s also possible that the general upswelling of activity associated with a stamp duty holiday ‘rush’ could prompt a further, short-term increase in prices. It happened after the last general election and it happened again when the property market emerged from lockdown. Transaction volumes increased and prices rose with them. If it happens again, then the net effects will probably only be short-lived, but it could support a faster market recovery and, thus, provide another reason for longer term optimism.

Summary Of Stamp Duty Reductions

The reduction changes to stamp duty, together with similar arrangements in Scotland and Wales, are helping to energise the housing market and, according to numerous reliable industry sources, investor confidence is rising sharply. Lower tax costs, combined with the historically low cost of borrowing, will all help to safeguard profits at a time of economic upheaval.

What is certain is that the new tax thresholds will make many new acquisitions cheaper and potentially more profitable in the longer term. The results won’t be felt equally across the UK; London and other higher-priced markets should see the most benefit, while the Scottish and Welsh markets may feel somewhat disadvantaged, particularly in the higher value property bands. However, as Manchester’s 31% surge in buy-to-let enquiries is now proving, market confidence is extending well beyond the South East. If the trend continues, as many expect it to do, then the stamp duty holiday may well bring important benefits to many other UK property investment destinations.

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