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What will the return of stamp duty mean for the UK housing market?

House prices are always headlining news. Whether is it threats of the property bubble crashing or concerns over the affordability of homes for first-time buyers, there is always a story centred around property in the UK.

This has never been truer than during the coronavirus pandemic. With various lockdowns causing disruptions to house viewings, there have been major concerns over what the pandemic might mean for the housing market.

The UK’s government answered these concerns by introducing a stamp duty holiday in an attempt to stimulate the market. In this article, we take a look at the stamp duty holiday and what it might mean now that it is coming to an end.

What is stamp duty?

To put it simply, stamp duty is a tax you have to pay to the government when you purchase residential property or a piece of land in England or Northern Ireland. Similar, but separate, systems apply if you are purchasing property or land in Scotland or Wales.

You have to pay stamp duty on both freehold and leasehold properties, regardless of whether you are purchasing them with a mortgage or buying them outright with cash.

How much stamp duty you must pay depends on how much you are buying the property for. It works in a tiered system, so you typically don’t pay any stamp duty on the first £125K and then pay increasing percentages on tiers over that amount. During usual times the tiers are as follows:

  • £0 – £125,000 = 0%
  • £125,001 – £250,000 = 2%
  • £250,001 – £925,000 = 5%
  • £925,001 – £1.5 million = 10%
  • Over £1.5 million = 12%

Source: Money Advice Service

If you are buying a second property, you are required to pay additional stamp duty taxes.

What is the stamp duty holiday?

In an attempt to help stimulate the property market the government introduced a stamp duty holiday in July 2020. This holiday applies to the first £500,000 of a property purchase. During the holiday, the following rates apply:

  • £0 – £500,000 = 0%
  • £500,001 – £925,000 = 5%
  • £925,001 – £1.5 million = 10%
  • Over £1.5 million = 12%

The stamp duty holiday was set to end on 31st March 2021 but was extended until the end of June to further benefit the housing market. In June the system will not go back to normal but go through a staged drop where the 0% tax rate will be available on properties up to £250,000, before eventually going back to normal from the 1st October 2021.

What impact has the stamp duty holiday had?

The stamp duty holiday did exactly what the government was hoping, massively increasing the demand for property during the pandemic. This is especially true for larger homes due to the bigger savings that can be made and the ‘race for space’ during a time where we were all spending more time in our homes.

Since the introduction of the stamp duty holiday in July 2020, we have seen a steep rise in house prices. In May 2021, the average asking price increased by 1.8% (£5,767), moving it up to £333,564.

This is a shocking statistic when you compare it to the fact that the average house price in the month before the introduction of the stamp duty holiday (June 2020) was just £238,000.

What does the end of the stamp duty holiday mean for the housing market?

As the stamp duty holiday comes to a phased end between June and October, there is no real way to tell what that might mean for the housing market.

Due to the massive impact the holiday has had on demand and prices, it would be reasonable to assume that the end of the holiday would have at least some negative impact on the growth of the market. The duration of the holiday has been clearly communicated, with one extension already taking place. It is unlikely that we will see another extension at this time.

Arguably, those who have been considering buying and selling will have aimed to do so during the stamp duty holiday, meaning demand could drastically drop off at the end of the holiday. This, in turn, is also likely to impact the average asking price of houses.

The Royal Institution of Chartered Surveyors (RICS) reported that they saw fewer properties coming on the market in April 2021, which has put a further strain on the supply for increasing demand and in turn further increasing prices. This could be an indicator that those looking to buy are still hoping to take advantage of the scaled-down discount on stamp duty, even though those who are willing to sell may have already done so.

As lockdown restrictions come to an end, it is assumed that many people will continue to work from home. This could mean that the ‘race for space’ continues, even once the stamp duty holiday comes to an end.

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