Designed as a cynical piece of electioneering, the Chancellor announces the Help to Buy ISA in his Budget speech. Like most knee-jerk policies, this was intended to attract the maximum amount of media coverage whilst the benefits to first-time buyers will be minimal. As Merryn Somerset-Webb sees it in MoneyWeek: “Handing over free money to compensate for rising house prices” in an “attempt to buy the votes of the young rather than actually help them” – I could not have put it better.
The new Help to Buy ISA accounts (‘Bisa’) are expected to be available from Autumn 2015 until 2019, but once an account is opened there is no limit on how you long you can save for. Under the rules, buyers will be able to pay in an initial £1,000 and then save up to £200 per month. As with existing ISAs, any returns will be free of tax but in addition, for every £200 saved, taxpayers will contribute a further £50, up to a maximum bonus of £3,000 on £12,000 saved. The government 25% contribution bonus only becomes payable when the funds are used to buy a property.
The ‘Bisa’ accounts will be limited to one per person rather than one per home, meaning first-time buyers saving for a deposit for a home will both receive a bonus. So a couple saving towards a first home together could benefit from a potential bonus of up to £6,000 as both savers would be eligible for a £3,000 bonus. The bonus will apply to both the amount a person saves into their Help to Buy ISA and the interest that has built up during the period the account is open. The bonus will be limited to first-time buyers’ home purchases up to £450,000 in London and up to £250,000 outside London. Help to Buy ISAs will only be available to those aged 16 and over.
The Stamp Duty reform announcement in George Osborne’s Autumn Statement is yet another example of UK Government’s generosity towards the house building industry. It could be argued that anyone buying a home, old or new-build will benefit, with reportedly 98% of homebuyers paying less from today. However the reform, whilst long overdue, will mean more people paying higher stamp duty in the long run with the housing market no longer constrained at the old price threshold levels and sellers free to tick up asking prices above the £125,000 zero threshold.
Many experts say the surprise change to the stamp duty system is likely to provide a fresh boost to the housing market and lead to higher prices for homes where the tax will be cut, property experts have warned. Mortgage lenders and estate agents have argued for a long time that this distorts the market, with house prices bunched just below thresholds.
There are few who could argue that stamp duty land tax is as unfair as it is unpopular and well past its ‘reform by’ date! With the current thresholds and the excessive tax incurred, it is hardly surprising that more and more people are staying put. A report in The Times highlighted that in the 1980’s, around 12% of all houses changed ownership every year. Last year the figure was just 4%.
There have long been calls for stamp duty to be made marginal, the same as income tax, so that the percentage paid relates to the amount above each particular threshold, rather than on the whole amount.
This is precisely what Scotland are introducing from April 2015 with their Land and Building Transaction Tax announced last week.
For a start no tax is due on properties sold for less than £135,000 – £10,000 higher than the rest of the UK. Then between £135001 and £250,000 a 2% tax is charged but only on the proportion above the nil-rate threshold. After that it gets a bit silly! A 10% tax is due on the proportion between £250,000 to £1 million and 12% on anything above £1million.
A bubble housing market with fewer homes being sold? Could the reason be Stamp Duty? A report in The Times highlighted that in the 1980’s, around 12% of all houses changed ownership every year. Last year the figure was just 4%. There are thought to be several reasons for this. More people are buying for an investment rather than to live in the home. Older people are living longer, meaning fewer of their homes are coming onto the market. The higher price of homes is also preventing people from trading up to a larger home as their families grow, with the government controlling both supply, via planning rules and high taxes and demand, bubbling up prices with schemes and subsidies such as Help to Buy.
But the main reason why many are staying put is the huge rise of the cost of stamp duty. In the 1980’s, no stamp duty was payable on homes that sold for less than £30,000 and only 1% was payable on everything else. Today, you pay nothing on homes under £125,000, but the rates increase until you are paying 4% on a £500,000 home and 5% on £1million property and that is on the total price, not just the proportion above each threshold. It could get worse in the future if nothing is done.
In teh UK a house worth £100,000 in 1985 (£150,000 in 1995) would cost about £525,000 today. In 1995, the stamp duty payable would have been just £1,500. If prices had gone up by general inflation since then (a lot less than they have) you would pay £2,442 stamp duty in today’s money. But even at today’s prices, at 1% you would still be paying only £5,250. But to buy the same house now, the stamp duty payable is £21,000. No small wonder people are not moving as often as they used to!