Stamp Duty Land Tax (SDLT) – the tax payable when you buy a property – has now come under attack from a substantial group of Conservative MPs. The Free Enterprise Group has called for Stamp Duty to be scrapped on all homes selling for less than £500,000.
The Group says:
"Stamp duty is a notoriously inefficient tax. Abolishing the 1% and 3% bands would cost £2. 4bn, and ensure it only kicked in for properties worth more than £500,000. ”
The Free Enterprise Group is not alone in calling for reforms to stamp duty. Whether Chancellor George Osborne will heed these calls in his forthcoming autumn statement remains to be seen. As SDLT is a cheap and useful source of revenue for the government don’t expect any major changes.
At present the duty kicks in at 1% on homes selling for more than £125, 000, and then rises to 3% when the price exceeds £250, 000. Above £500, 000 the rate increases to 4%, and rises even higher on properties worth more than £1 million.
Stamp Duty distorts the housing market and conflicts with Help-to-Buy
In the last few weeks the Council of Mortgage Lenders (CML) has criticised the current system, saying that it is distorting the housing market and hampering efficient use of the existing housing stock.
The CML argue that stamp duty adds to the up-front cost of home-ownership and is in conflict with initiatives such as Help to Buy.
They also point out that the government is likely to raise nearly as much revenue from stamp duty this year as it did in 2007, despite far fewer homes currently changing hands. Sales this year are likely to total only around one million as against 1. 6 million at the height of the property boom.
Government getting rich from rising home prices
This rise in revenue is partly a result of the creation of higher tax bands. But it seems that much of the rise in the tax take is due to rising property prices, especially in London and the South East, which have put more and more homes in higher stamp duty tax bands.
The tax creates other inefficiencies in the housing market; which, in the view of the CML, compounds some of the acute problems rooted in the UK’s chronic inability to ensure that housing supply grows in line with household formation.
One of the main criticisms of the current SDLT system is way that stamp duty thresholds are not indexed so that they increase in line with house price inflation.
While house prices were falling or at least remaining stable that was less of a problem. But with prices in many areas now rising again a growing proportion of transactions become liable for stamp duty, and an increasing number are captured in higher bands.
75% of stamp duty revenue comes from homes worth over £250k
Figures show that more than three-quarters of stamp duty revenue now comes from higher rate bands, levied on purchases for more than £250, 000. And around half of revenue is derived from transactions in excess of £500, 000 – even though those accounted for just 7% of all property purchases in 2012.
Another major criticism of the present system is its "slab" structure, whereby duty is calculated on the whole of the price at the rate for the relevant tax band. For example, if you buy a property for £550, 000 the duty payable will be £22, 000, i.e. 4% on the whole of the price.
This slab structure creates distorts house prices near the points at which the rates change – nobody will buy a property for a small amount over one of these points. This will either cause sellers to reduce their asking price or they will try and negotiate some sort of "under-the-counter" deal so that the buyer can avoid higher rate duty.
High stamp duty rates are discouraging people from moving
The CML says that stamp duty liabilities are now large enough to discourage some people from moving home, regardless of whether their accommodation needs are growing or contracting (for example, in old age). As a result they think that the UK may suffer the effects of an increasingly inefficient use of the existing stock, with larger dwellings disproportionately in the hands of the elderly – under-occupied and perhaps not maintained as well they should be.
The cost of SDLT may also be discouraging people from moving when their employment location changes. If this is so, then stamp duty may contribute to the burden on transport infrastructure and act as a source of more general economic inefficiency.
Another argument for change is that the high levels of tax make it more attractive for people to try and find ways of avoiding it. Several tax-avoidance schemes which were previously the province of commercial companies are now being marketed to residential buyers. This has led the government to bring in more and more stringent anti-avoidance legislation – but tax lawyers will no doubt continue to explore possible loopholes.
Don’t expect major changes anytime soon
There have been well-argued calls for reform in the past, which successive governments have generally ignored.
It does seem nonsensical that the government, and particularly the Chancellor, is trying to encourage growth in the housing market through initiatives such as Help-to-Buy on the one hand, but on the other is doing nothing to remove a major disincentive to would-be buyers.
However, it is unlikely that the government will make any radical changes any time soon, at least so far as England and Wales are concerned. The fact is that SDLT is very cheap to collect and brings in significant revenue so there is little incentive to make any major change.
Let us hope that Mr Osborne will take heed of what his own backbenchers are saying.