Stamp duty stings. Buyers fall in love with a home, excitedly get their finances in order, but then realise that Stamp Duty Land Tax (SDLT) agonisingly puts the purchase out of reach. It seems unfair. Why should buyers pay thousands of pounds to secure their dream home when they’re already paying through the nose? It stinks.
Well, the good news for frustrated buyers is that public opinion might be turning against SDLT. Politicians and campaigners want a fairer approach whilst the Home Owners Alliance has campaigned to scrap the tax altogether. Even the non-political Institute of Fiscal Studies (IFS) has recommended that Chancellor Sunak shelve this “particularly damaging tax”.
But is stamp duty really that bad? And what on earth would replace it? We wade through the quagmire of property taxes and peer through the fiscal fog below…
Stamp duty rules ok
Nobody likes SDLT but it has its uses. Whilst it’s true that the current stamp duty holiday is pushing property prices through the roof – pun very much intended – abolishing SDLT altogether is a far bigger step than a temporary freeze.
Stamp duty raises approximately £10 billion for the Treasury every year. We can’t ignore this at the current time. The IFS estimates that the government needs an extra £60 billion per year to cover day-to-day spending after Covid-19 so this probably isn’t the time for tax cuts.
Furthermore, there’s little doubt that stamp duty pushes up house prices – which is great news for estate agents. SDLT holidays are also a good way to stimulate economic growth at opportune times. The current stamp duty freeze, for example, has witnessed a 45% increase in first-time buyer purchases. None of this would be possible if stamp duty went the way of the dodo.
The flipside is that rising house prices can be problematic, too. It makes it extremely difficult for people to get on the property ladder. Although rising prices are largely due to population growth accelerating faster than available housing stock (which increases demand), stamp duty can exacerbate the problem.
Rising prices also means that buyers need to save up more, and wait even longer, before they can afford a deposit. Research by Halifax has found that the average amount put down by first-time buyers last year was a whopping £57,000 compared with £46,000 in 2019. In London, the figure was an astronomical £130,000. How many people can afford that?
Consequently, although SDLT is good news for those already on the housing ladder, it might ultimately backfire. After all, it’s more jam for homeowners at the expense of renters, whilst developers might lose confidence in their ability to sell homes if buyers can’t afford them.
Stop. Don’t move.
Another problem with stamp duty is that it makes moving extremely expensive. If you buy a home in England for £400,000, for example, then you’ll usually pay a deposit of £20-40k. Throw stamp duty on top and you’re looking at another £10,000. What’s worse, SDLT is paid on top of what you borrow; you can’t simply increase your mortgage to cover the cost.
When you consider the other costs of moving home – valuation fees, surveys, conveyancing, removals, repairs, plus storage – it’s easy to see why abolishing SDLT might help. Stamp duty stops people from moving. And that’s bad for business and the Treasury too.
Abolishing stamp duty would reduce the level of cash needed upfront and open up the housing market to thousands of new buyers. It would get the market moving and the economy humming. Yes, Rishi’s coffers might take an immediate hit, but the long-term bonanza might be worth it.
Ring the changes
But before anyone advocates abolishing SDLT, it’s worth considering all the alternatives. And this includes reforming stamp duty. The government could allow buyers to pay the troublesome tax in stages over time, for example, rather than in one hefty lump sum.
Another option would be to abolish SDLT for lower value homes but retain it (at a reduced rate) for high value properties. Or the government could tweak the bands so that higher rates only apply to properties costing £millions. Others have suggested exempting the elderly from stamp duty. This would make it cheaper for them to move and free up housing stock for families.
The most intriguing idea, however, would be to switch stamp duty around so that it’s paid by sellers. This topsy-turvy concept titillates for two reasons: (a) it helps first-time buyers, and (b) it places the tax burden on those who are receiving hefty funds from a sale; therefore it’s more affordable. Whilst this isn’t a perfect solution – it could be a disincentive to sell – it’s worth pondering.
The nuclear option
Some would rather consign SDLT to the dustbin rather than reform it. But what are their ideas? And would they fly? The answer is a resounding maybe. The IFS has suggested replacing stamp duty with an improved version of council tax. Others have proposed a small capital gains tax on primary homes instead.
Groups like Fairer Share and Generation Rent, on the other hand, are suggesting a radical single flat-rate payment based on a home’s value instead. This new “proportional property tax”, which would replace both SDLT and council tax, simultaneously would be charged annually. But how much would homeowners pay?
Fair Share suggests 0.48% of a property’s value. That means the average person would pay just over £1,280 per year based on the UK’s average house price of £267,000. This would be great for some but homeowners in London, where prices regularly exceed £1 million, might feel differently. After all, they’d be expected to pay from £4,800 per year – an enormous hike from council tax.
Doing the maths
So what’s the solution? It’s hard to say. It all depends on the hard economics. The buying agency Ludgrove, for example, has calculated that a 36% decrease in stamp duty rates could mean a huge 40% rise in sales. This would generate an extra £1.44 billion in tax revenue and £8.38 billion in business revenue – a windfall the Chancellor surely wouldn’t be able to resist.
But not everyone agrees with the figures. What’s more, there’s a danger that we’re overestimating the influence of SDLT altogether - especially when it comes to house prices. Why? Because at the end of the day, a house is only worth what a buyer is willing to pay. And this old cliché arguably transcends the whole debate.
If stamp duty is high, then buyers can afford less. And when stamp duty is low, then buyers can afford more. The result? Agents will always adapt to new realities and set prices as high (but realistic) as they dare. Consequently, in an SDLT-free world, we wouldn’t be surprised if sellers simply ask for more money. And then we’d be back to square one.