Stamp Duty suppressing prices of thousands of properties

Terrace with for sale sign

Research commissioned by London Central Portfolio, the key findings of which have been released in advance of Chancellor George Osborne’s Autumn Budget announcement on Thursday 5 December, have shown that the 3% Stamp Duty threshold is suppressing the price of thousands of properties.

The increase of the Stamp Duty rate from 1% to 3% at the £250,001 benchmark means that over nine times as many transactions occur just under the threshold (£240,000–£250,000) than just above it (£250,001–£260,000). The large tax hike means that the difference between the tax paid on a property worth £250,000 and a property worth just £1 more is a staggering £5,000.

This led to 19,643 sellers reducing their asking prices by up to £10,000 during 2012 in order to ‘duck under the ceiling’, according to LCP. They also estimated that a further 9,721 sellers were unable to sell at all, as the price discount was too much for their own buying aspirations.

LCP’s findings were based upon the Land Registry’s Price Paid Data for 2012, which recorded the price achieved for every sale in England and Wales (other than company transfers, probate sales and repossessions) during the year. LCP’s full findings will be published in the coming weeks.

Stamp duty: a snapshot

Stamp Duty has been charged at 3% on properties worth between £250,000 and £500,000 since March 2000, despite the average house price more than doubling during this time. The rate initially rose to 2% in 1997 and again to 2.5% in 1999, and LCP claims that each time it did so, the spike in purchases under £250,000 became more pronounced.

Tax experts criticise this ‘slab’ system – wherein a single rate is payable upon the entire property price – claiming that it distorts the market. The bandings create a ‘dead zone’ just above the ceiling, where sellers must either reduce their asking price by a large amount or wait until their home achieves a value far enough beyond the threshold that the buyer’s decision is not impacted.

More and more properties – particularly in London, where the average selling price is currently £390,720 – are entering this ‘dead zone’, and it is estimated that a further 52,654 properties will do so in the next five years.

Pressure to review this system is mounting on George Osborne ahead of his Budget announcement. Senior tax advisers have called for a Stamp Duty reduction for properties worth between £250,000 and £300,000, whilst the Council of Mortgage Lenders (CML) is calling for a marginal rate system – much as tax is currently charged on income – wherein different tax rates would be payable upon proportions of the house cost above a certain amount.

For instance, someone purchasing a £275,000 residential property would pay nothing on the first £125,000, 1% on the next £125,000 and 3% on the final £25,000, resulting in a total tax bill of £2,000 rather than £8,250.

If LCP’s findings are accurate, the truth of Stamp Duty’s impact upon the housing market is indisputable – and at a time where house prices are once again rising steadily, this certainly needs to be addressed.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.