The stamp duty exemption for first-time buyers could cause house prices to rise, which would wipe out any potential savings.
The Office for Budget Responsibility (OBR) has warned that the abolition of stamp duty for first-time buyers making home purchases worth £300,000, announced in the Autumn Budget, could result in only 3,500 extra home purchases.
It calculated the move would bump up house prices by around 0.3%, potentially wiping out savings for buyers.
Chancellor Philip Hammond used his Budget to try and win over younger voters, providing them with a tax break worth up to £5,000. First-time buyers purchasing property up to £300,000 will pay no stamp duty and those living in more expensive areas will be able to claim the tax break on the first £300,000 on properties worth up to £500,000.
Paul Johnson, director of the Institute of Fiscal Studies (IFS), said the price rise could be bigger than the stamp duty cut because properties are transacted multiple times and, in part, because of the leverage effect.
‘If I pay £1 less in stamp duty, I can put down £1 more deposit, meaning I can obtain a larger mortgage,’ he said. ‘So the £1 cut allows me to spend more than £1 more on a house.’
However, he said first-time buyers wouldn’t automatically be worse off and instead of paying ‘£100,000 for £98,000 worth of house plus £2,000 tax, they might be paying £102,000 for £102,000 worth of house’. He describes this as a better outcome.
When the stamp duty cut is taken in conjunction with other measures the government has put in place to help young people to get onto the property ladder, first-time buyers could save up to 10% of the price of a property, according to AJ Bell.
Analysis shows that when the stamp duty cut is combined with the tax breaks offered by the lifetime ISA (LISA), this could equate to a huge saving.
Savers aged 18 to 39 can benefit from the LISA, which launched in 2016. It sees the government pay a 25% bonus of up to £1,000 for those saving £4,000 a year. Withdrawals from the LISA are tax-free if used to purchase a first home worth £450,000 or less, or taken after the age of 60.
Tom Selby, senior analyst at AJ Bell, pointed out that a first-time buyer purchasing a property worth £300,000 would have paid £5,000 in stamp duty, so they can benefit from that automatic saving following the Budget announcement.
He added that someone who saves £4,000 a year into the LISA for a decade could end up with a fund value of £66,000 when the bonus and investment growth is taken into account.
‘The combination of the £26,000 government bonus, investment growth via the LISA and the £5,000 stamp duty saving means the house would cost £274,000 - a 10% reduction,’ he said.
‘While the stamp duty relief is good news for first-time buyers, with a maximum saving of £5,000 and an average saving of £1,660, it’s hard to see it as a game-changer for most young people on its own.
'However, once you combine it with the tax-free investment returns and government bonus available via the LISA for first-time house purchases, the package starts to look more attractive,' he said.
In spite of the benefits, take-up of the LISA has been subdued. The OBR has reduced its forecasts for what the LISA will cost the government by 40% to £2.6 billion, as the savings wrapper has failed to gain traction.
‘This suggests a greater incentive may be needed to encourage more people to use LISAs and a higher bonus could be accommodated within the initial cost estimates,’ said Selby.