A major reform of Stamp Duty was perhaps the most unexpected item in yesterday's autumn statement by the Chancellor.
The new system which comes into force for completions taking place after 3rd December means that most homebuyers can expect substantial savings on the amount of Stamp Duty they will have to pay.
The Chancellor reckons that 98% of homebuyers will benefit from his reforms – but those paying more than £1million for a property will be hit by even higher tax bills.
New graduated tax system will mean lower Stamp Duty bills for most buyers.
Stamp Duty Land Tax (or SDLT) will now be charged at different rates depending on the portion of the purchase price that falls within each rate band. This is a major shift from the previous 'slab' structure where duty was payable on the whole of the price according to the band in which it fell.
Now there will be no SDLT on the first £125,000, 2pc between £125,000 and £250,000, 5pc between £250,000 and £925,000, 10pc between £925,000 and to £1.5m, and 12pc over everything above.
Before the changes someone buying a home for £275,000 would have to pay SDLT at 3% on the whole of the price - £8,250.
But now the Stamp Duty will be only £3,750 calculated as follows:
0% on the first £125,000 = £0
2% on the next £125,000 = £2,500
5% on the final £25,000 = £1,250
Total SDLT payable = £3,750
Abolition of 'slab' structure is long overdue
In the past, successive governments have been deaf to calls for reform to what has been seen as an increasingly out-dated method of charging Stamp Duty, which had been little changed for over 100 years.
But with an election looming next May it seems that the Chancellor has seen changes as a handy vote-catcher.
He may have also been swayed by the fact that a similar graduated system is due to be introduced in Scotland next year, and English and Welsh voters would see it as being very unfair if the Scots were getting a better deal.
Buyers of higher-value homes face massive increases in SDLT
While most buyers will now pay less under the new rates buyers of higher-value homes will be hit much harder than before. Above £1.5million the tax payable will rise sharply, with tax on anything over that amount now being charged at 12%.
Most commentators see this as a way of pre-empting proposals from other political parties for a 'mansion' tax on high-value properties. And no doubt Mr Osborne is hoping he can recoup some of the money he is 'giving away' at the lower end of the scale.
There is no doubt that the Chancellor's reforms of Stamp Duty are long overdue and will be welcomed by the majority of buyers. First-time buyers will benefit but the changes will also help existing owners wanting to trade up.
Changes could also benefit many sellers
The changes should also help sellers, especially those whose properties were valued at around one of the thresholds of the old tax bands.
For instance it would have been difficult to sell a home for say £255,000 or even £260,000 because if the price was just over £250,000 the rate of duty would jump from 1% to 3%. This would cause the buyer's SDLT bill to rocket from £2,500 to £7,650 or more.
So sellers often had to accept a lower price than they might have done if they wanted to sell their home.
Under the new arrangements this should not happen – the tax on a sale at £255,000 will be just £250 more than at £250,000.
New top rates of SDLT could lead to increase in tax-avoidance schemes
How the new rates will affect sales of higher-value homes remains to be seen. But there is already evidence of a slow-down in the market at this level which may be the result of concerns about a mansion tax being introduced by a new government next year.
The Chancellor might like to reflect that the sort of people who can afford to pay over £1.5m for a home are also likely to afford expert tax advice. So we can probably expect to see a growth in Stamp Duty avoidance schemes, despite the various anti-avoidance measures which have been put in place in recent years.