3rd December 2014
Central London residential fund manager LCP has calculated the impact of the stamp duty reforms with homes between £1.5m and £2m potentially subject to the biggest tax hit.
Yet the firm says the market will be freed up extensively at the £250,000 mark where, according to LCP’s research, the number of sales between £250,000 and £260,000 are just 10% of those between £240,000 and £250,000. The cliff-edge has forced people to take prices lower than they had hoped or wait up to 2.5 years to achieve the true value of their property. The firm believes that this should now allow people to trade up and that this should help get first steppers onto the ladder.
This is likely to increase buying activity and stimulate a sluggish market in England and Wales which outside Greater London has only seen 3% price growth over the last year, with prices no higher than the peak before the credit crunch.
The Stamp Duty Land Tax changes will benefit all buyers looking to acquire under £937,500 where their tax bill will be less than currently says LCP. For everyone buying over £937,500 the new regime will be detrimental in tax terms, except for a lucky few.
LCP says there is also a small purple patch between £1m and £1.125m where buyers can make a saving to the tune of £5,750 under the new regime, so for those who have exchanged already and can opt for either scheme, they should opt to transact under the new system. Apart from this group, all buyers who have already exchanged above £937,500 should go for the old system.
There will be 57% saving for the average property in England and Wales, amounting to £4602 and in Greater London this will be £4250, a 26% saving says LCP. However, in Central London the Stamp Duty charge will go up by £37,883, a 43% increase.
|Q3 2014 Land Registry Average Price||Current SDLT (£)||Current SDLT (%)||New Progressive SDLT (£)||New Progressive SDLT (%)||Change in Stamp Duty Payment||%
|England & Wales||£269,890||£8,097||3.00%||£3,494||1.29%||-£4,602||-56.8%|
LCP notes that the Chancellor has stated the number of people buying properties above £925,000, the level at which the charge steps up to 5%, is relatively few and far between, amounting to just 2% of all transactions. However, put another way that is 1 in every 50 households. It must also be remembered that the 3% Stamp Duty threshold at £250,000 was set 14 years ago in 2000 and has not moved since. A property of that value then would be equivalent to one worth £750,000 today. The firm says that unless indexation is introduced, it will not take many years for a far greater number of people to fall into this new Stamp Duty trap.
In Greater London, the number of transactions over £1m is almost 10%. In other words 1 in 10 households will be affected. In Prime Central London, this increases to over 50% of households and 1 in every 2 will be affected.
There is, however, an unfortunate fall out for those looking to buy between £1.5 and £2m. The way the new SDLT works means that those who have sought to avoid higher rate SDLT at 7% and the potential new Mansion Tax by ducking under the new £2m price point, will now be the worst hit. The percentage increase in SDLT will be an average of 41%. This then falls away dramatically, only getting back to equivalent increases at the £4m mark.
|Price Bands||Avg Old||Avg New||Avg SDLT Change|
At £2m, a buyer will now have to find an additional £53,750, 54% more than they were paying under the previous regime. LCP says that this is a big ask and says that previous evidence shows that when Stamp Duty increased from 5% to 7% in 2012 at £2m and households were immediately required to find an additional £40,000, transactions in the domestic market outside Prime Central London fell by over a third. It is easy to envisage that we will see a similar impact on the market between £1.5m and £2m, a market previously “safe” from onerous tax rises says the firm.
For those buying between £2m and £3m, the new Stamp Duty regime will be far more penal than the £2,500 suggested by Labour for an annual Mansion Tax. With the additional Stamp Duty outlay of £63,750 at £3m, it would take 25 years before balancing the books says LCP.
With regard to London maintaining its attractiveness on the international map the increase in Stamp Duty, whilst not palatable, is at least one that can be calculated as part of the cost of access to a world class market.
LCP adds: “It is also clear that the Chancellor has done his homework on the levies on other international centres and the tax is not out of kilter. In Hong Kong, Buyers Stamp Duty (BSD) is flat rate of 15%. There is also a Sellers Stamp Duty which is 8.5% over $HK21,739,130 (£1,787,351) which increases to as much as 20% if the property is held for less than 36 months. In Singapore, the BSD can be up to 3%, plus an Additional Buyer’s Stamp Duty (ABSD) which is 5% for the purchase of one residential property, 10% for a second hold and 15% for foreigners and entities.
“The increase in Stamp Duty, of course, will have an impact on the Prime Central London market in the short term although, as with the introduction of the 7% level, this is likely to rectify itself. The market for properties up to £5m is likely to suffer from price sensitivity, although between £2m and £3m, the Stamp Duty increases are not significantly more in absolute terms than between £1m – £2m, with the extra charge at £2.8m being £53,750, the identical increase as at £2m.”
The new Stamp Duty, however, does make for some big numbers when you talk about a property at £9,052,085 with a Stamp Duty tax tag of £1m. The impact will be limited however, given that Land Registry statistics show only 67 purchases above this level in the last year.
LCP adds: “The part of the market in Prime Central London which will come out on top is the exceedingly important private rented sector. This represents 50% of the market and is fundamental to underpinning London’s importance as a financial, cultural and educational central. The Chancellor has been very careful not to burden this sector with the ATED (Annual Tax on Enveloped Dwellings) nor the higher rate Stamp Duty of 15% for enveloped dwellings used for private residences. This sector mainly comprises properties under the £1m mark which therefore remain unscathed and, indeed, will be a less costly investment than previously”.
On the subject of ATED, however, LCP says the Chancellor was misleading on the level of rise being implemented for properties over £2m, suggesting it was 50% over the rate of inflation. It is in fact far greater than this and will deter more people buying their own private residence in a wrapper. The rates will now be as follows from April 2015:
|Property Value||Annual Tax on Enveloped Dwelling||Annual Tax on Enveloped Dwelling|
|From||To||(ATED – 2013/14)||(ATED – 2015/16)|
The Chancellor also did not mention in his statement whether or not the current higher rate Stamp Duty (at 15% for enveloped dwellings bought by owner occupiers) will remain a standalone slab tax. We await clarity on this point.
LCP adds: “High value buyers will be facing a hefty tax bill, although not dissimilar to other international centres and it will probably be factored in the cost of entry into this global market. It will also be more desirable than a Mansion Tax, where any decision making about whether or not to pay it is taken out of the owner’s hands. The core investment market in Prime Central London which targets the private rented sector and properties under £1m will benefit from the new tax regime.
“The main losers will be domestic buyers who are acquiring family houses in London and have intended to dive under the 7% Stamp Duty threshold and any potential Mansion Tax, by looking for a property between £1.5 and £2m. They will now be facing up to a 50% increase on their tax bill, amounting to up to around a further £50,000. This is going to be a very tough ask; more than the £40,000 that was asked in 2013 for purchases over £2m. It is likely that this sector will completely collapse for the foreseeable future.”