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Harris on Mortgages

In a vote-winning gesture, Chancellor Gordon Brown announced the rise in the stamp duty threshold from 60,000 to 120,000 in last week’s Budget.

It was expected that Brown would increase the threshold to just 100,000 but, ultimately, most believe the change does not go far enough to make a difference and Brown should have bitten the bullet and gone up to 150,000.

The Halifax tentatively welcomes the increase and estimates that 157,000 first-time buyers will potentially benefit. But by its calculations, the stamp duty threshold would be 156,900 if it had been increased in line with the rise in house prices since March 1993, the last time the threshold was increased.

The Council of Mortgage Lenders says if the threshold had been increased in line with house price growth, it would be around 130,000. Which-ever figure you choose, it still means that Brown has come up short in his calculations.

Conservative leader Mich-ael Howard asked the electorate to remember that it was Brown who froze rises in the threshold in his first eight Budgets while also raising the tax on stamp duty in his first four Budgets.

Charcol product development manager Elliot Nathan says the changes will help buyers in the North-east, North-west and parts of Wales and isolate most first-time buyers in the South-east and especially in London, where the average house price is 284,633.

According to the CML, only 5 per cent of properties for sale in London cost less than 120,000. In the North-east, two-thirds of properties sold last year would have escaped stamp duty.

Purely Mortgages chief executive Mark Chilton says: “Instead of shifting the tax burden from the propertyrich to the property-poor, the Government has simply paved the way for some regional growth, offering no incentive for buyers in major UK centres, where property prices are so much higher.”

The rise in the threshold is is estimated to cost about 450m. If Brown had raised the threshold to 150,000, it would have cost 600m.

To pay for the tax break, Brown has abolished stamp duty relief on commercial property in deprived areas – three year after introducing it. This is expected to save 340m. He introduced the relief to encourage firms to set up business in 2,000 poorer areas but the move backfired because it meant expensive buildings in areas such as Canary Wharf and Holborn became exempt.

But most people in the property sector say the reforms have not gone far enough. Industry bodies, including the Building Societies Association, believe there should be more fundamental reform to the “slab” system to smooth out pricing anomalies and make the stamp duty system fairer.

Abbey chief economist Barry Naisbitt says that under a graduated system, where you pay tax on anything over 120,000, homebuyers would be treated a lot more fairly. For example, on a 150,000 with tax paid at 1 per cent in the current system, a homebuyer would pay 1,500. Under a graduated system, the buyer would pay 300, that is, 1 per cent on 150,000 minus 120,000. This would avoid unnatural price barriers caused by stamp duty thresholds.

The CML submitted a pre-Budget report to the Government at the start of March recommending to not only reduce the burden of stamp duty on homebuyers but to “reform this lazy and unfair tax over the life of the next Parliament”.

In research commissioned in 2003, the CML pointed out that it would be possible to change to a graduated structure with a starting threshold as high at 115,000 at 2001/02 prices – around 160,000 at today’s prices – and still maintain revenue levels for the Exchequer.

Mortgage Express chief economists Peter Charles says: “The CML must be wondering why it is working at these very thorough tax-neutral reviews but the Government does nothing about it, probably for political reasons.”

But there is some support for Brown in the mortgage community. Pink Home Loans managing director Tony Jones says distributor-commissioned research among mortgage intermediaries found that 90 per cent believe the threshold should go up to 150,000. But he thinks this could have been a dangerous move.

Jones says: “My only concern about making an increase in one go was the potentially inflationary impact on house prices, especially for firsttime buyers, one to two years down the line.”

He says a rise to 150,000 could inflate house prices, especially in the North of England. This inflationary effect would mean that other firsttime buyers would be unable to get on the property ladder.

Jones says: ‘Ultimately, I would want to see stamp duty levels linked to house price increases but I suspect the Chancellor had the election at the front of his mind when making this increase so it is unlikely that increases will continue into next year’s Budget.”

Legal & General director (housing marketing protection and housing) Stephen Smith says the Chancellor has been generous. He says people in the South-east will still struggle but he is confident that lenders are working hard at maintaining competitive but prudent products.

He says: “Lenders will continue to stretch their minds. There are some products out there like, dare I say it, the Max 130.” This product was launched by Mortgage Express in January, offering 130 per cent LTV.

According to the Office of the Deputy Prime Minister, the average house price for the first-time buyer is 145,408. A stamp duty threshold of 120,000 will still find firsttime buyers struggling to meet the burden of this tax.

Lenders such as Alliance & Leicester say they will cont-inue to press for first-time buyers to be made exempt from paying the tax.

As FTBs in London scratch their heads and wonder how the Budget has helped their prospects of getting on the property ladder, Brown waits for the election and, ultimately, his promotion.

The final Budget before a general election was always going to be high on feelgood factor rather than a serious attempt at revenue-raising and Chancellor Gordon brown did just that, freezing several taxes and announcing measures to help families, pensioners and first-time buyers. He may face a 19bn shortfall in his finances this year yet he was never going to use this Budget to try and address that in any meaningful way.

Doubling the nil-rate band on stamp duty to 120,000 may help a few first-time buyers onto the ladder but not the majority. If you are buying in London, forget about it, with website calculating that just 2.2 per cent of properties for sale in the capital cost less than 120,000. It is the same story for pretty much the whole of the South-east (7.5 per cent of properties), South-west (10.4 per cent) and even the North, which has the highest proportion of houses for sale under 120,000 at 31 per cent.

With the average property in the UK costing just under 163,000, according to the Halifax, and latest Government figures showing that the average first-time buyer pays 145,408, many first-time buyers will still be stuck in the stamp duty trap. But doubling the stamp duty threshold will cost the Government 250m a year while scrapping stamp duty relief on commercial property transactions in disadvantaged areas – also announced in the Budget – will in effect save the government 340m.

What I would have liked to have seen is a complete overhaul of the system where moving from one tier to another means paying the higher rate of tax on the whole transaction so the buyer purchasing a 135,000 flat who currently has to pay 1,350 in stamp duty would only have to pay duty on the amount in excess of the new nil-rate band – a far more affordable 150. Of course, the beauty of this is that it would not only benefit first-time buyers but the entire housing market. Plenty of homeowners who have considered moving have thought twice once they have done a rough calculation to find out how much of a hit they will take on stamp duty.

Applying tiering across the board would bring stamp duty into line with other taxes as well as make it much fairer. It would also benefit a far greater number of homebuyers and give a kickstart to the bottoming-out housing market.

The Government is well aware that the doubling of the stamp duty threshold will not solve the problem of the diminishing number of first-time buyers because it is also extending the homebuy scheme. This time, it is partnering the CML to offer a shared equity scheme that will finance 25 per cent of the purchase price of a property with a 0 per cent loan, the buyer funding the rest through a mortgage. The Government claims this will help a further 100,000 people buy through low-cost homeownership schemes.

But like the social homebuy scheme announced by John Prescott earlier this year, these are modest numbers. And those 60,000 starter homes that the Government has such grand plans for will not build themselves. Worryingly, only one housebuilder – Redrow – has so far committed itself to building them. No other builder will touch them.

There are plenty of challenges ahead for the affordable housing market, which we are heavily involved in through our subsidiary SPF Sherwins. Our consultants are devoted to helping first-time buyers get onto the housing ladder. While the rest of the housing market slows down as the dearth of first-time buyers prevents those wanting to trade up to their second home from doing so, the affordable housing sector is where the real growth is at the moment and likely to remain so for the next decade.

Mark Harris is managing director of Savills Private Finance



Is this year’s Budget good for your clients?

Levy mettle

At the beginning of this year, I started a series of articles reviewing the progress of certain key pension issues and highlighting opportunities for pension advisers to assist corporate and personal clients.


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