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On December 3rd, 2014, Chancellor George Osborne announced a radical cut in stamp duty as part of the Autumn Statement 2014. With the newly-announced changes, most homebuyers in the UK are expected to save on stamp duty expenses when changing homes.

As per the revised rules, stamp duty will now be charged on a progressive basis, just like the way income taxes are charged. Let's understand the impact of this change on homebuyers by looking at the old and new stamp duty bands.

You can calculate and compare the stamp duty tax costs associated with these changes to stamp duty tax calculation changes using our Stamp Duty Tax Calculator

### Old stamp duty bands

Price of PropertyStamp Duty Rate on the Entire Price
Up to £125,0000
Between £125,000 and £250,0001%
Between £250,000 and £500,0003%
Between £500,000 and £1,500,0004%
Between £1,500,000 and £2,000,0005%
Above £2,000,0007%

### New stamp duty bands

Price of PropertyStamp Duty Rate
Up to £125,0000
Between £125,000 and £250,0002%
Between £250,000 and £925,0005%
Between £925,000 and £1,500,00010%
Between £1,500,00012%

To the onlooker, it may seem the stamp duty rates have increased. However, the newly-announced reforms have brought a major difference in the way stamp duty is calculated.

Example 1: You want to buy a property worth £300,000. Under the old stamp duty rates, you were required to play a flat rate of 3% on the entire amount of £300,000 as this amount fell in the slab of £250,000 to £500,000. This would have resulted in a stamp duty of £9,000 (3% of £300,000). However, under the new rates, the total amount will be charged on a progressive basis.

Here's how the calculation will work out under the new rules:

 Up to £125,000 0 Between £125,000 and £250,000 2% Between £250,000 and £300,000 5%

As you can see, a major difference under the new rule is that there is no stamp duty on the first £125,000. And for the amount between £125,000 and £250,000 stamp duty is charged at a rate of only 2%. This will result in a total stamp duty of £5,000 under the new rates as opposed to £9,000 under the old rates.

The new stamp duty rates came into effect from the midnight of 4th December, 2014. According to Osborne, this change will provide stamp duty savings to 98 percent of homebuyers. The stamp duty bill will be higher only for those buying homes above £937,000.

Homebuyers who have exchanged contracts but are yet to complete the process can choose between the old system and the new system, whichever is beneficial to them. The choice is aimed to prevent a collapse of property rates around the country.

This recent change is one of the major changes to stamp duty laws since 1997, when Gordon Brown had introduced higher rate bands. Until that point, homebuyers paid a flat 1 percent stamp duty on transactions above £60,000. Initially, Brown introduced a stamp duty of 1.5 percent for property purchases above £250,000. This was increased to 2 per cent by 2000. Similarly, the stamp duty for purchases above £500,000 was 2 percent initially but was increased to 4 per cent to boost government's revenues during the property boom. Once rates were increased, in spite of the high house price inflation levels, there was never any reduction in the top and higher stamp duty thresholds.

### The need for stamp duty reforms

The idea behind the new rule is to provide relief to families faced with high stamp duty expenses while purchasing a property. As seen in the example, the main cause of high stamp duty was the slab-based system. The buyers who were the most hit under the old rules were the ones whose home price was between £250,000 and £500,000. That's because the stamp duty suddenly jumped to 3% from 1% for the previous slab. As we saw in the example, a homebuyer was paying £9,000 on a property of £300,000 under the old rules. That's a substantial amount for an average homebuyer who also has to take care of other moving expenses like deposit, valuation fees, surveyor's fees, real estate agent fees, legal charges, and removal costs.

### The beneficiaries of the new rule

As per treasury figures, all homebuyers who purchase property for less than £937,000 stand to gain from the new rule. Some examples of beneficiaries are listed below along with the benefit amount.

• If the property price is £210,000, a buyer will now pay a stamp duty of only £1,700 as opposed to £2,100 earlier.
• For a property worth £275,000, buyer will now pay only £3,750 as stamp duty as opposed to the earlier £8,250, resulting in savings of £4,500.
• For a property worth £510,000, a buyer will get stamp duty savings of £4,900.

### The people who will pay more

The new changes are expected to increase the stamp duty payable for buyers falling in the higher slabs. For example, someone buying a property worth £1.5 million will now pay £93,750 in stamp duty, an increase of £18,750 over the £75,000 payable earlier. And someone buying a property worth £2 million will now pay stamp duty of £153,750, an increase of £53,750 over the earlier amount of £100,000.

### The market's reaction

Industry experts like Ben Southwood, the head of research at the Adam Smith Institute, have welcomed the chancellor's move. Immediately after the announcement of this radical cut, there was a surge in activity of prospective homebuyers. Buyers raised the offers they had made previously or made offers for more expensive homes, thanks to the availability of extra funds. Estate agents also saw a sudden jump in enquiries.

Sellers increased their prices anticipating an increase in demand as buyers will now have more funds to spend on the property. As another advantage for sellers, they are no longer under any pressure to price their property below the stamp duty thresholds. For example, earlier if a seller wanted to sell his property for say £252,000, he would be hesitant to set this price because of the sudden 1% rise in stamp duty after £250,000. To avoid making the price unaffordable for buyers, the seller preferred to sell the property for less than £250,000 as this meant lesser stamp duty for borrowers. As per research conducted by Zoopla, an online estate agent, more than 28,000 properties were sold below their exact value every year, simply to avoid paying higher stamp duty. The latest rule is expected to give sellers more flexibility when pricing their property.

However, experts feared a drop in the prices of luxury properties due to the new stamp duty rule. Foxtons, an upmarket agency focussed on London, saw a 6.3 per cent drop in its share price following the chancellor's announcement.

Some people who purchased houses a few weeks ago were disappointed on missing out on the benefits of the stamp duty cuts. But a few others, who were about to close their property deals got a positive surprise with the new stamp duty rules.

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