How the Stamp Duty holiday works for homebuyers and landlords

The Chancellor has granted a stamp duty land tax holiday to homebuyers in England and Northern Ireland with immediate effect. It means that buyers of homes valued at up to £500,000 will no longer pay any stamp duty on the purchase. Article by Nick Green.

In a bid to boost a housing market still in shock from the COVID-19 property freeze, Chancellor Rishi Sunak introduced a measure that could save the average homebuyer over £2,000. Stamp duty land tax (SDLT), often known simply as stamp duty, will be cancelled on all property purchases up to half a million pounds. Sunak hopes that this will provide the much-needed kick start that the property market in England needs, following predictions that house prices would tumble and cause market stagnation this year.

The last stamp duty holiday was way back in 2008, in a bid to lift the market following the financial crisis. In a move costing £600 million, the then-Chancellor Alistair Darling suspended stamp duty for a year on properties worth up to £175,000. It’s a measure of the severity of the current crisis that Johnson’s government is now removing SDLT up to a £500,000 threshold, at an estimated cost of £1.3 billion to the Treasury. The current stamp duty holiday will however be not quite as long, at around nine months, and is provisionally set to end on 31 March 2021. However, the expectation now is that Sunak will extend it to the end of June, which is when the nation is expected to come out of lockdown and return to workplaces.

Richard Donnell, Research & Insight Director at property website Zoopla, said, ‘Stamp duty holidays are a tried-and-tested way to support housing market activity. [This] will ensure almost nine in ten sales will be free of the tax, compared to just 16 per cent now.’

Stamp Duty’s on vacation – but only in England and NI

Stamp duty is technically only paid in England and Northern Ireland, since the devolved administrations of Scotland and Wales have set their own property taxes (Land & Buildings Transaction Tax in Scotland, and Land Transaction Tax in Wales). For this reason only England and NI will enjoy this stamp duty holiday.

Stamp duty is payable on the purchase of a property – typically within two weeks of completion – and is charged in ‘slices’ based upon the property price. A 2% charge applies to the slice of property between £125,000 and £250,000, so with the average home in England selling at £247,000, existing homeowners buying their next home could potentially save around £2,440 each.

However, different bands apply to first-time buyers. First time buyers are already exempt from stamp duty if their purchase is £300,000 or less, and if the property is under £500,000 then they pay no stamp duty on the first £300,000 (above which the tax applies as normal). Therefore, the majority of people hoping to get on the property ladder will see no financial benefit from this stamp duty holiday. The benefit that they will see – hopefully – is that owners are more willing to sell, knowing they might saving money on their next purchase.

Perhaps inevitably, buyers of more expensive properties will end up saving more as a result of the Chancellor’s decision.

Will buyers or sellers benefit from the stamp duty holiday?

In theory it is buyers of properties who benefit from stamp duty holidays, since it is buyers who pay the tax. However, the evidence from 2008 suggests that home owners often end up pocketing the extra money. Knowing that their buyer won’t have to pay stamp duty can be an incentive for a homeowner to keep their asking price high, particularly in the case of more costly properties where stamp duty can account for bills running into several tens of thousands. Who ultimately benefits most may come down to the negotiating skills of individual buyers and sellers. Overall it is likely that the stamp duty savings will end up being split down the middle, with sellers managing to pocket half of the difference.

Will buy-to-let property and second homes be included in the stamp duty holiday?

Rishi Sunak’s announcement may have slightly disappointed buy-to-let landlords and anyone planning to buy a second home. When you buy any property in addition to your main residence, be it a second home, a holiday home or a buy-to-let, there is an additional stamp duty charge. This starts at 3% and then rises in bands, climbing to 15% for the most expensive properties.

 The omission of additional properties in the stamp duty holiday is probably a wise political move on the part of the Chancellor, as it could be seen as disproportionately favouring landlords and those with multiple homes. That said, buy-to-letters should welcome the measure as it stands, as they will still be able to reduce their SDLT bill by more than a third in most cases.

Therefore it will be no surprise if the buy-to-let market receives a similar kind of boost to the homebuyer market. Mary-Anne Bowring, founder of lettings platform PlanetRent, said, ‘The Chancellor’s proposals to exempt most homebuyers from paying any stamp duty under plans to kick-start Britain’s economic recovery is welcome news. A stamp duty holiday would no doubt cause a rush of transactions and help breathe life into a housing market that has been put into deep freeze in an effort to battle coronavirus.’

Will the rest of the stamp duty bands stay the same?

The stamp duty bands or 'slices' will remain otherwise unchanged. So for the duration of the holiday, there will be no 2% stamp duty band. Instead, stamp duty will jump straight to 5% for the 'slice' from £500,000 to £925,000 and then to 10% for the slice up to £1.5 million.

How much can you save with the stamp duty holiday?

Put simply, the more expensive the property that you’re buying, the higher the stamp duty have been – so the more you will save if you can buy it before 31 March 2021. The maximum amount a buyer could save would be if they bought a home worth £500,000 which is the threshold for the exemption. Stamp duty on this would be £15,000. However, a canny seller will be aware of this and might try to use it in negotiating the price, so the buyer might end up saving less in real terms.

Will the stamp duty holiday be extended?

Many who hope to benefit from the stamp duty holiday fear that it will not last long enough for them to complete their home purchases. The conveyancing process takes a long time even under optimal conditions, and new lockdowns have not helped. Furthermore, the stamp duty holiday itself has caused a surge in demand, meaning that solicitors and estate agents are overwhelmed with demand at an especially difficult time.

As a result, 14 trade bodies have called on the Chancellor to grant a stamp duty holiday extension. Currently there is a 'cliff edge' on 31 March which means that all transactions completing after this date will not benefit from the cut in stamp duty. Depending on the prices that have been negotiated, this could abruptly make some purchases unaffordable for the buyers in question, thus causing entire property chains to collapse. This would be a blow for the housing market, and something that the government may want to avoid.

So far there are no plans to extend the stamp duty holiday, and it is arguable that it would cause a 'cliff edge' whenever it ended. However, some have suggested that a phased or tapered approach might provide more security to homebuyers - for example, by allowing buyers to benefit from the stamp duty cut if they have exchanged contracts but not yet completed by the deadline (because stamp duty is payable on completion). However, this is speculation.

One possible way to beat the deadline may be to buy a property at auction. Buying a home via auction can take as little as one month, so may increasingly become a preferred option as we draw nearer to April 2021.

Find out our tips for negotiating a house price. If you're planning to take advantage of this tax break and buy before April, you can find your mortgage broker using the link below.

As well as being able to seek assistance from a mortgage adviser via the link below, you might also find it helpful to discuss and set your financial goals with a financial coach, too.