The impact of changes in stamp duty on transaction numbers this year will be greater than at any other time, analysis by Knight Frank suggests.

Peaks and troughs in sales volumes before and after the various changes to the stamp duty rate in 2021 will provide a helpful case study demonstrating how the tax shapes the market, according to the company’s head of UK residential research Tom Bill.

Under the so-called “stamp duty holiday”, the nil-rate band for home buyers purchasing their main residential property was increased to £500,000, meaning many people have avoided having to pay the tax or paid a much lower rate.

The nil-rate band will reduce to £250,000 at the end of June and back to its original level of £125,000 at the end of September, although more generous reliefs will return for first-time buyers.

Bill says: “The impact of stamp duty on property transaction numbers will be greater in 2021 than during any other year.

“Over the course of a normal year, activity in the UK housing market can generally be split into the two periods of spring and autumn.

“This year, it will divide neatly into four calendar quarters.”

In the first quarter Bill says there was a “false start” as the stamp duty holiday was originally supposed to expire at the end of March, but the tax break was extended by the chancellor on March 3.

The second quarter has seen another wave of buyers rushing to complete before the end of June when the nil-rate band reduces to £250,000 for most buyers.

The third quarter will see the impact of the tapering down of the tax break and buyers rushing to complete before the holiday finishes completely at the end of September.

The final quarter will reflect the after effects of the tax break as thresholds return to their previous levels.

Bill says: “In effect, 2021 will be a case study for how differing rates of stamp duty impact the property market.

“The holiday is part of the government’s attempts to boost the UK economy as it recovers from the pandemic. 

“A maximum stamp duty saving of £15,000 will taper from the end of this month to £2,500 in September. 

“So far, its impact has been substantial.

“UK transaction numbers reached a record level in March, the month of the false start, taking the total annual spend in the housing market to levels not seen since before the global financial crisis. 

“Sales that had been lined up to complete went ahead anyway, irrespective of the announcement on March 3 that the end of the holiday had been deferred.

“Transaction numbers then fell by 36% in April, provisional HMRC data shows. 

“It was the third largest monthly decline on record even though it followed a deadline that did not ultimately materialise. 

“The biggest monthly drop was recorded in April 2020 as the country entered its first national lockdown. 

“The second largest decline was in April 2016, the month a 3% stamp duty surcharge was introduced for second-home owners and landlords. 

“The fourth largest drop was in January 2010 following the end of a previous stamp duty holiday.

“The impact of stamp duty on transaction numbers is clear. 

Indeed, there are parallels between 2016 and 2021, with both years experiencing a spike in March followed by a drop in April.”

Bill says that there is every reason to expect a second large spike in transactions this month ahead of the stamp duty changes on June 30.

He says: “One lesson from 2016 to consider as we attempt to anticipate what happens when the holiday ends is that tax deadlines can put off prospective sellers, some of whom will opt to wait until market conditions normalise.”

He says the end of the stamp duty holiday is one reason that supply should start to build later this year and house price inflation return to single digits.

Bill adds: “It is a safe conclusion that there will be fewer transactions in July than June. 

“However, the extent of any decline in Q3 will be mitigated by the fact fewer people will take overseas holidays this summer, as well as other regional factors, which we shall explore in more detail in future.

“Only by the fourth quarter, barring any unforeseen events, will the monthly swings in transaction numbers start to look a lot less dramatic.”