Time to revise stamp duty to revitalise housing market?

Alistair Darling, the Chancellor of the Exchequer, will deliver his first Budget on 12 March. Many would-be home buyers are hopeful that a revision of stamp duty land tax to bring it in line with house prices will be top of his agenda. A variety of groups, including the National Association of Estate Agents, the Council of Mortgage Lenders and the Conservative party have been campaigning to persuade Mr Darling to update what's viewed as one of the most outdated taxes we have in existence.

Moneyextra's mortgage calculators can help you work out what you can afford.

Stamp duty land tax thresholds out of date?

The last time stamp duty went through a major overhaul was in 1997, more than a decade ago.

Heres a potted history: before 1997, stamp duty was charged at a flat rate of 1% paid by buyers on all property valued at more than £60,000 and you paid it on the whole value of the property if you breached that threshold - there's no 'zero rate' band as such.

In 1997, Labour introduced two new tax bands of £250,000 to £500,000; and £500,000 plus, which have remained the same ever since. However, the percentage paid on stamp duty has been increased since then - rising from 1.5% to 3% on properties between £250,000 and £500,000; and from 2% to 4% on properties worth more than £500,000. Remember, you pay the tax not in incremental steps (as you do with income tax) - if your property value takes you into the top band, you'll pay that percentage on the whole value.

The initial threshold band of 1% on £60,000 was revised in 2005 to £120,000 and raised again to £125,000 in March 2006.

However, house prices hae risen from an average of £58,391 in 1997 to £181,080 in December 2007, according to Nationwide Building Society. It's clear why the number of first time buyers has been falling and the average age of first time buyers has been rising. With house prices going up to dramatically, more and more buyers are pulled into the net - no wonder it's perceived as being a stealth tax.

Halifax said that the number of homes in the 3% band jumped by 201% from 1.8 million in 2002 to 5.5 million in 2007; and the number of properties in the 4% band has risen by 337% to 1 million.

In London and the South East £250,000 would buy a fairly modest home (you'd be lucky to find a house at that price) yet the stamp duty would be £7,500 and on £500,000 it's a whopping £20,000!

Find out how our independent mortgage service works.

Where should stamp duty be now?

Showing how outdated stamp duty is, Halifax said that had the thresholds been aligned to house prices, the £250,000 and £500,000 bands would now be £720,000 and £1.4 million. The lowest, now at £125,000, would be £191,000. Halifax wants the Government to raise stamp duty thresholds in line with house price increases and to index it to house prices in the future.

Stamp duty is a real bugbear for first time buyers. Post-credit crunch, they're being asked to find ever larger deposits. Nationwide, for example, now expects a 25% deposit or you'll pay a premium interest rate. Having to fork out for stamp duty on top of everything else makes buying a home even tougher than it already is.

Many buyers have to add the cost of stampe duty into their mortgage meaning that they are now paying interest on it.

Sure about your mortgage choices? If you're not and you need someone to talk to, why not call us for independent, unbiased mortgage advice.

27 February 2008 © Moneyextra.com

back

Moneyextra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.