The Stamp Duty changes make housebuying more fair but don’t address the supply problemLeave a comment
December 8, 2014 by Paul Goldsmith
The Chancellor’s big ‘Rabbit out of the Hat’ moment for Wednesday’s Autumn Statement (as in the one bit that wasn’t leaked to the press beforehand) was to completely change the way the stamp duty land tax (hereafter just called ‘stamp duty’) works. Apparently, when he announced the policy during a meeting of Cabinet that morning there were a lot of knuckles rapping on the table (apparently a sign of approval in that world). The next morning, before Osborne himself became the story by refusing to submit to any serious questioning on how he would achieve his announced targets, the newspapers were broadly positive about this change. This is partly because it addressed a problem with the stamp duty regime that had caused great issues for the housing market, but also because it benefitted 98% of homebuyers, whilst raising the tax for the very rich.
Before I get into explaining the change, it’s worth pausing to explain what Stamp Duty is and how it was created. Stamp duty is a tax charged on transactions, for which a physical ‘stamp’ used to be needed. It is charged mainly on home purchases and the selling of shares and securities. It was created in 1694 as William of Orange needed some money to fight a war against France, and his Finance Minister came up with the idea as a way to raise that money. That this became the basis of a tax is one of the reasons it is criticised. But the Stamp Duty land tax on the transfer of properties was attacked also for the way it snarls up the house market due to the unfairness of its ‘slab system’.
The ‘slab’ system meant that a band of prices would have a percentage of the entire price charged on it. So a house priced at £250,000 would attract stamp duty of £2500, because it was 1% of the total price for ANY purchase between £125,000 and £250,000, but a house priced at £250,001 would attract a charge of £7500. One of £500,000 would attract a charge of £15,000 but a purchase of £501,000 would be liable for £20,000 as the stamp duty went up from 3% to 4%. The next slab was at £1 million (5%) and the next was at £2 million (7%). The reason this distorted house prices was because a home was very difficult to sell if it cost just above a threshold. This means that many agreements were made to sell at £249,999 or £499,999, as any price of say £265,000 or £515,000 meant enough of a rise in stamp duty that the property couldn’t be sold.
The new system introduced by the Chancellor works like income tax, in that it gets incrementally higher. How it works is that a property buyer will be charged nothing on the first £125,000 of the property price. Then they will be charged 2% on the next £125,000 of the price, then 5% on the portion up to £925,000, 10% on the portion up to £1.5m, and 12% on anything higher than that.
These reforms will cost the government £800m in revenue, but the focus is more on the fact that the average house price in the UK is £275,000, and someone buying for that would save £4,500. Meanwhile, someone buying a £2.1m house would see a hefty increase of £18,750 in stamp duty.
I use the £2.1m figure on purpose. Labour’s mansion tax idea charges a yearly amount on properties worth over £2m. This can be charged to everyone earning over £42,000 a year, but that is still a small amount to be earning to have to pay the amount of the tax if you are living in a property in London with the associated costs of living there. A property worth £2.1m in London could be a flat bought for less than £10k 40 years ago by someone now on a pension. The changes in Stamp Duty mean that it is those with the means to buy a property of over £1m NOW that have to pay more, and it would be taken into account when they make the choice of whether to buy it.
Apart from yet another cut in tax revenue from a Government that claims to be serious about cutting the deficit, the biggest issue that one could have with this stamp duty change is that it will once again encourage demand in an overheated housing market by reducing the buying cost for 98% of buyers. This is why I am still waiting for an announcement on a serious house building programme from the Conservatives. When you add these changes to the ‘Help to buy’ scheme, you can see why something to address the supply side of the market is long overdue.