Stamp duty cut 2022: new rate, band thresholds, how it’ll impact first time buyers - changes to tax explained

The Chancellor of the Exchequer has cut taxes and slashed regulations in a far-reaching mini budget

With the new Prime Minister Liz Truss wanting to implement a trickle down economics agenda, business taxes like corporation tax have been slashed. In a bid to boost the UK economy ahead of an expected recession later this year, the Chancellor has also sought to boost the housing market.

He announced a stamp duty cut to MPs that he hopes will get more first time buyers on the housing ladder. But what is stamp duty - and how much has it been cut by?

Here’s what you need to know.

Stamp duty is a tax on property purchases (image: Getty Images)

What is stamp duty?

Stamp duty is basically a tax on property purchases. Everyone buying a house, flat or land has to pay a proportion of the price of it to the taxman, although some types of buyer pay a lower rate than others.

At present, you do not pay stamp duty on the first £125,000 of any residential property purchase. The first tier of the tax is between £125,001 and £250,000, where you have to pay a rate of 2%.

The second tier - £250,001 to £925,000 - has a 5% rate; the third - £925,001 to £1.5 million - has a 10% rate. Meanwhile, anything above £1.5 million carries a 12% rate.

Stamp duty raises £12 billion for central government every year (image: AFP/Getty Images)

First-time buyers in England have a higher threshold of £300,000, which applies if the purchase price is under £500,000.

Rules differ in the other UK nations. In Scotland, for example, the threshold of the equivalent tax to stamp duty (the Land and Buildings Transaction Tax) sits at £145,000, or £175,000 if you’re a first-time buyer.

Stamp duty is a big source of revenue in England. The UK government raises about £12 billion a year from the property tax.

UK house prices are at record levels (image: AFP/Getty Images)

What is the stamp duty cut 2022?

In his mini budget on Friday (23 September), the Chancellor Kwasi Kwarteng effectively announced an immediate stamp duty tax cut. The rates of the tax will remain the same, but the thresholds are set to change.

The initial threshold will double from £125,000 to £250,000, while first-time buyers will not pay anything on the first £425,000 of a property - a £125,000 increase in the tax’s threshold.

First-time buyers will also benefit to a change in the criteria allowing them to access this discount. Rather than it only applying to properties under £500,000, it will now apply to those valued at £625,000.

Kwasi Kwarteng wants to get more people on the housing ladder (image: Getty Images)

“Home ownership is the most common route for people to own an asset, giving them a stake in the success of our economy and society,” the Chancellor said.

“So, to support growth, increase confidence and help families aspiring to own their own home, I can announce that we are cutting stamp duty.

“The steps we’ve taken today mean 200,000 more people will be taken out of paying stamp duty altogether. This is a permanent cut to stamp duty, effective from today.”

At present, this tax cut only applies to England as stamp duty rates are the remit of the devolved UK administrations.

Why has stamp duty cut been announced?

When she campaigned to become the leader of the Conservative Party, Liz truss stood on what she described as a ‘pro-growth’ ticket. Part of her strategy to avert the UK recession economists have forecast comes in the form of tax cuts.

Her Tory leadership rival, Rishi Sunak, warned this policy could prove inflationary. UK inflation has been at 40-year highs and is rapidly eroding consumer purchasing power.

The headline taxes Ms Truss has cut include national insurance (which was raised by Rishi Sunak) and corporation tax (which had been due to rise in April 2023).

According to reporting by The Times in advance of the announcement, Liz Truss believed the stamp duty tax cut would encourage economic growth because it would allow more people to move house, and would encourage first-time buyers.

The cut comes against a backdrop of what some house price indexes suggest could be a slowing market. As well as a major cost of living crisis, mortgages have also become more expensive as a result of the Bank of England’s decision to raise interest rates to 14-year highs.

Liz Truss wants to cut taxes to stimulate economic growth (image: Getty Images)

It was praised by the HomeOwners Alliance - a pressure group promoting home ownership.

“The government's changes to stamp duty mean more people will be able to afford to get on the property ladder. It's especially welcome at a time when interest rates are driving up the cost of borrowing,” said CEO Paula Higgins.

“The fact the change is permanent and starts today is particularly welcome as it will avoid the chaos of the previous stamp duty holidays. It means those who had put their move on hold earlier this week when speculation began can now crack on with their exchange and completion.”

Long-term low housing stock has meant more and more people have struggled to get on the housing ladder (image: Getty Images)

But the cut in stamp duty risks “doing more harm than good” by forcing house prices up and making mortgages even more expensive, according to Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown.

“You can see why the Government is concerned about the housing market, because there’s a risk that rising mortgage rates and rising prices will dampen buyer enthusiasm. We know from recent experience that a stamp duty holiday effectively stimulates demand,” she told the PA news agency.

“No buyer will ever complain about a tax cut, but if the Government was to cut stamp duty it would mean ignoring the fact that the real brake on the property market is a severe shortage of supply.

“Stimulating demand without addressing supply problems would risk more buyers chasing a tiny number of properties, which would push prices up. It’s what we saw during the coronavirus-inspired stamp duty holiday.

“By ramping up prices at a time of rising mortgage rates, the end result will be higher monthly mortgage costs, which are going to be increasingly unaffordable. This in itself could be enough to deter buyers.”

Houses prices in Bristol have dropped for the first time in 10 months

The stamp duty holiday implemented by Rishi Sunak in 2021 pushed house prices to record highs. The most recent Office for National Statistics data showed the average house price was 15.5% up against the year in July 2022 - the equivalent of an extra £39,000.

Meanwhile, in September the Royal Institution of Chartered Surveyors said average housing stock levels were at a record low of 34 homes per estate agent branch. It all means moving home is likely to be harder for prospective buyers.

Should the UK enter a recession, as is expected, it is likely the housing market would slow down yet further.