Back in early December 2014, the then-Chancellor, George Osborne, unveiled a major overhaul of the stamp duty land tax system, reducing the tax on lower-value home sales but increasing it significantly on homes valued over £1.5m.
Osborne replaced the unpopular “slab” system – where stamp duty was levied on the entire value if a property’s selling price crossed a certain threshold – with a “slice” system as with income tax, where higher rates are levied on successive amounts of a property’s value. He claimed 98% of home purchasers would pay less tax, while increasing the amount of money raised by the buyers of the most expensive homes.
Stamp duty rates were increased to 5% on the portion of the purchase price from £250,001 to £925,000 and to 10% on the amount between £925,001 and £1.5m. Previously, the highest stamp duty rate was 7% but, as part of the reforms, a new 12% rate for the share of the purchase price over £1.5m was also introduced.
While the average stamp duty bill on a home in England fell a little initially – from £2,033 to £1,557 as a result of the changes – bills for the most expensive homes rose dramatically.
For a £1m property, the stamp duty bill rose by nearly 50% overnight, from £30,000 to £43,750. And for a home worth £2m, the tax more than doubled, from £60,000 to £153,750. In broad terms, the share of total stamp duty revenue from homes selling for £1m and over went from a quarter to a third under the change from the slab to slice system.
When the stamp duty holiday ends in April 2025 and the nil-rate band falls from £250,000 back to £125,000, the average mover in England will pay £5,479 in tax, 170% more than they did on 1st December 2014, just before Osborne changed the system. This means a typical mover will spend a record 1.8% of their purchase price on stamp duty (up from 1% now and a decade ago). For a home worth £2m, this figure will more than quadruple to 7.7%.
By contrast, throughout most of the 1980s and 1990s, the average English household moved stamp duty free. Until 1997, the top marginal rate was 1% on properties selling for more than £60,000.
Whilst it’s hard to prove definitively, our view is that the stamp duty slice system has put wealthier households off moving – notably downsizers, or those selling larger homes to move somewhere smaller. This has reduced the number of transactions taking place and affected people’s ability to move up, across and down the housing ladder.
While the change from slab to slice meant that most movers were initially better off by facing a lower tax bill, that benefit has started to unwind over time thanks to fiscal drag from rising house prices and static tax thresholds. When the nil-rate threshold for home movers falls back to £125,000 from April, even more people will be paying higher rates of stamp duty; plus they have to contend with higher mortgage rates than borrowers over the past decade.
London, where property prices are the highest in the country, has been particularly affected. At present, the average London buyer pays £13,779 in stamp duty, or 2.6% of the purchase price; in April, that will rise to £16,279, or 3.6%.
In general, the downsides of the slab system are more obvious than the slice system, particularly since the slab system created cliff edges in the market. However, longer term, the slice system has the potential to choke the market if the thresholds don’t move with house price inflation since the headline rates are much higher. And you only have to look at income tax or business rate thresholds to see how common this has become and how much of a revenue raiser it is for the Government.
