From Hair Cuts to Tax Cuts

Home » From Hair Cuts to Tax Cuts Published: 14th July 2020 This Article was Written by: Jessica Burton   economy , financial outlook , interest rates

As the UK slowly emerges from nationwide lock-down measures Chancellor Rishi Sunak has taken centre stage and presented his summer plans to support the second phase of the economic battle against Coronavirus to the House of Commons today.

The impact of Coronavirus on the economy has been unprecedented in modern times. GDP was around 25% lower during the worst of the crisis in April than it was in February, and this year’s budget deficit is expected to be larger than at any time since World War II. The government is borrowing record amounts to fund wide ranging support schemes, and with investors looking for safe havens in troubled waters the yield or cost of this debt is also at historic lows. The total debt owed by the UK government now stands at over 100% of GDP at circa £1.9tn.

How quickly the economy can recover remains to be seen and should lock-down measures need to be tightened again, there will be some twists and turns in our road to recovery.

Even though government borrowing is so high, one of the most eye catching measures the chancellor has put in place (aside from 50% off a Monday night pizza) is a stamp duty ‘holiday’ or temporary tax cut on buying a house. As of today no stamp duty will be paid on a residential property purchase up to £500,000 (unless the purchase is a second home or Buy to Let), this will cost the government a very healthy chunk of the £12bn a year that this tax generates, however getting the housing market moving is seen as a number one priority in allowing the whole economy to function, with people being able to change location to help fuel economic needs around the country.

This is massive news and will impact the majority of would be homeowners in the UK. The average house price in the UK as of march 2020 is £231,855. There are parts of the country which are more expensive, in London the average house price stands at around £595,000 according to Zoopla or £626,962 according to Rightmove. Even in London a considerable amount of properties transactions in the capital will also be able to participate in this holiday and even higher end buyers will see their tax bill slashed.

While this could mean a massive saving for a lot of people, it could also have the unwanted effect of pushing prices up. Vendors may state that now the costs to purchase are lower buyers can afford to offer more, this has a ripple effect through the market and again means that first time buyers bear the brunt when it comes to affordability issues, as they don’t get to benefit from ‘increased’ equity in a property they already own. As this is only a temporary measure, if this does happen what does that mean once the holiday is over? Prices are already high from years of cheap borrowing, could releasing the shackles of tax simply pump more air in to the bubble of UK housing only for it to pop when the tax is re-imposed.

So what does it actually mean for you?

On the face of it this is very exciting news for first time buyers and all property buyers alike, however the fact that the vast majority of mortgage lenders have been capping their new lending applications at 85% means that a lot of first time buyers, after scrabbling and saving for years are suddenly finding they need to get together another 5% more deposit than they had expected to need to buy a property. If high street lenders refuse to return to this 90% level then it still may be some time yet till we see a real bump in buyer activity.

Over the last couple of years we have seen a lot of first time buyers purchasing more long term homes to avoid having to pay repeated stamp duty costs and plan for the future. While this move does remove that barrier, we expect to see this trend continue as the average age of the first time buyer is over 30 and it may be likely that they are looking for a property to start a family in.

Lack of stock has been the major problem for the housing market for decades, this change to stamp duty could also give the people who have been thinking of moving for a while (or realised during lock-down that there wasn’t enough space in their small London terrace for their two kids, 2 cats and a dog) the nudge and slight reassurance they needed to make the leap and list their house.

This will also give older generations more comfort in moving, with lower costs making downsizing more attractive
In short this huge tax cut has the potential to massively help a lot of homeowners across the whole UK housing market and will hopefully have the desired effect of getting us moving, contributing to the UK recovery from Coronavirus.

We are ready for your enquiries! Get in touch and we can see how the changes affect your individual circumstances.