UK government suspends property stamp duty to encourage housing revival

British Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling attempted to kick-start the housing market today with a temporary stamp duty holiday as a new report suggested the outlook for the UK economy had deteriorated. This tax-suspension is the first such move in 17 years.

In a move the Treasury said would cost £615 million, it is abolishing stamp duty from Wednesday on property transactions between £125,000 and £175,000 and the relief would last a year until 3 September 2009. The move means that nearly half of all property transactions would be exempt from stamp duty in the coming year.

The extension to stamp duty exemption was part of a wider £1 billion package of measures to help first-time homebuyers and people struggling to keep up with mortgage payments. Currently buyers of homes up to a threshold of £250,000 pay 1 per cent stamp duty while a higher charge of 3 per cent applies up to £500,000 purchases and 4 per cent above that.

As finance minister, Brown raised stamp duty rates on properties above £250,000 in 1998, 1999 and 2000, leaving the lowest 1 per cent rate unchanged. The threshold for paying the lowest rate doubled to £120,000 in March 2005 and rose to £125,000 a year later. Higher thresholds have remained unchanged since they were introduced in 1997.

''We face a unique set of circumstances that we have not seen in a generation,'' the Chancellor said, ''I remain optimistic that we can get through it. We will get through it.''

He will expect that this relaxation in taxes will help pull the country out of the biggest ever housing slump in recent history.(See: UK in the midst of the biggest-ever housing slump, HBOS study reveals)

However, there were some doubts on Tuesday about the effectiveness of the measures as the Organisation for Economic Cooperation and Development forecast the UK economy would contract for the remaining months of this year. The report follows similar dire predictions by the IMF and the country's own Office for National Statistics. (See: IMF downgrades UK's growth rate, says inflation pressures to continue and British economy grinds to a standstill; technical recession likely, say experts)

The Paris-based OECD downgraded its forecasts for Britain by much more than other countries and said it was more likely than not that the economy would shrink in the third and fourth quarters of the year.

The latest assessment of the UK economy by the OECD added to the pressure on the pound, which fell below $1.80 for the first time in more than two years on Monday. The pound tumbled 1.2 per cent to $1.7785 against the dollar and dropped to a fresh record low against the euro of £0.8162.

The latest Land Registry figures show there were roughly 15,000 property transactions in May that were valued between £125,000 and £175,000 and would now be temporarily exempt from stamp duty. Today's announcement stops some way short of rival proposals, put forward by the Conservatives a year ago, to abolish the levy for all buyers up to the £250,000 limit.

Aside from the stamp duty ''holiday'', the most concrete measure is the strengthening of support for people who lose their jobs to keep paying their mortgages. The waiting period for this measure, Income Support for Mortgage Interest, will shorten from 39 weeks to 13 weeks and the capital limit for claims will be raised from £100,000 to £175,000. The cost of the change will be an estimated £100 million.

There has also been the rollout of a scheme to allow housing associations to buy homes from those facing repossession - at market rates - and rent them back. Those who do ''sale-and-rent-back'' deals with private operators, who are unregulated, are sometimes ripped off by unscrupulous companies. Housing associations could also offer shared ownership deals where they take ownership of part of the home - reducing the occupiers' mortgage repayments.

Separately, ministers also announced a new £300 million shared equity scheme called ''HomeBuy Direct'' where buyers can borrow up to 30 per cent of the value of a new-build home - co-funded jointly by the government and developer. The loan will be interest-free for five years.

The product - the latest of a handful of similar schemes - may prompt criticism from those concerned about encouraging first-time buyers into the market at a time of falling prices.

The revival plan lifted UK homebuilders in London trading. Taylor Wimpey Plc, the country's largest house builder, gained as much as 13 per cent, while Persimmon Plc advanced as much as 10 per cent and Barratt Developments Plc as much as 8.3 per cent.

Brown's Labour government has trailed the Conservative opposition in polls since October and is planning a package of measures to help consumers cope with the credit crunch. The opposition said the measures don't go far enough.