Economist Dean Garratt gives his thoughts on the new changes to Stamp Duty, which came into effect this week.
"The general principles underpinning the reforms to the system of Stamp Duty introduced following the Autumn Statement will be welcomed by many economists and many who work in the property sector. The introduction of a graduated system of tax means that the amount paid by house purchasers will be dependent upon the proportion of the value of the property that falls in each of five tax bands. This will remove some of the significant distortions in pricing under the previous system where the whole of the purchase price was subject to one of a number of progressively higher tax rates. For example, under the previous system the tax liability on a property costing £126,000 was £1,260 compared with a zero liability on a property costing £125,000. Other similar distortionary spikes in what economists call the marginal rate of tax occurred at the start of each tax band.
While the removal of the significant distortions to pricing that the old system of Stamp Duty created is welcome there is some unease around the short-term implications for house prices of the bands and rates under the new system. The fact that anybody purchasing a property at £937,000 or less will have their tax liability cut raises concerns of a boost to house prices. This may be particularly unwelcome in areas, especially in the South East, where inflationary pressures are more significant. In London where the average house price is currently £510,000 the new Stamp Duty regime will mean a saving of £4,900 or 24 per cent. In the Midlands, which is a good barometer of the market in the rest in the country, there will be a saving of £550 or 28 per cent on the average property purchase of around £195,000. Therefore, even in markets where house price inflation is more subdued there is the potential that the changes to the Stamp Duty system will, in the short term at least, boost housing demand and fuel house price growth.
Dean Garratt is available for telephone interviews.
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