Stamp duty cut may have a reverse effect, experts warn

UK chancellor of the Exchequer Kwasi Kwarteng announced a cut in stamp duty to encourage economic growth by allowing more people to move and enabling first-time buyers to get on the property ladder. However, after this announcement by the UK Government to cut to stamp duty in a bid to ease the burden for first time buyers, experts warned it may have the reverse effect.

It may be recalled that the stamp duty threshold was increased temporarily to £500,000 during the pandemic to help stimulate the property market. The plan announced by the Chancellor sets an ambitious target for 2.5 percent trend of growth, securing sustainable funding for public services and improving living standards for everyone.

The stamp duty threshold for house buyers will rise from £125,000 to £250,000 and from £300,000 to £425,000 for first-time buyers. The maximum value of a property on which first-time buyers' relief can be claimed will also increase from £500,000 to £625,000.

Raising the threshold to £250,000 means that a third of all homes currently for sale are now completely exempt from stamp duty in England, up from 7 per cent when the threshold was £125,000, according to Rightmove. In recent months the housing market was thought to be softening, as the cost of living crisis and rising interest rates began to dampen demand and activity. 

In his statement, Kwarteng said the move would help an additional 200,000 people get onto the housing ladder, but experts are sceptical that it will be first time buyers who gain from the announcement. A leading criticism of the plans is that cutting stamp duty will increase demand pushing house prices up further due to the lack of supply, increasing the financial hurdle for first time buyers.

According to the most recent Office for National Statistics (ONS) figures, the average UK house price jumped by 15.5 percent in the 12 months to July 2022, marking the biggest increase in 19 years. The average house price was £292,000 in July – £39,000 higher than at the same time last year. That leap in annual inflation was mainly because of "a base effect" from the falls in prices seen this time last year, as a result of changes in the stamp duty holiday, the ONS said.

The stamp duty threshold for house buyers in the United Kingdom will rise from £125,000 to £250,000.

Nadia Fatima, a State employee and a prospective first time buyer said: 'Even though this move by the Government looks good, if the demand for houses increases, the prices are likely to rise and the extra amount paid towards the house will be more than the actual saving made on the stamp duty.” With scepticism, Fatima noted “… the very exercise may be pointless'.

When the Government introduced a stamp duty holiday in 2020 in order to sustain the housing market the increase in activity saw house prices spike. According to the American commercial real estate services and investment giant CBRE, overall transactions in the year to June 2021 increased by 19 per cent compared to the previous 12 months. However, the activity was concentrated within the most expensive property bands that saw the greatest savings from the tax freeze.

The Chancellor accentuated that the tax cuts and reforms he announced were the biggest package in generations and a clear signal that growth is the Government’s priority. “Cuts to stamp duty will get the housing market moving and support first-time buyers to put down roots. …we’re accelerating new road, rail and energy projects by removing restrictions that have slowed down progress for too long,” Kwarteng noted. “We want businesses to invest in the UK, we want the brightest and the best to work here and we want better living standards for everyone”.

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