Stamp Duty

There has been much talk of stamp duty reform in recent months, but is all this talk just the latest whinge of the property industry or is it really a valid complaint that the treasury should take note of and potentially win over voters with in the upcoming elections?

Well, let’s start by considering what the actual complaint is. Those proposing reform claim that the existing system is both archaic and too expensive. Archaic given the lumpy bands in which it is applied creating ‘dead zones’ in sales prices. Expensive because house prices have risen much faster than inflation over a number of years, so the amount paid is not a fair representation of what was intended when the system was introduced. Let’s consider each of these in turn:

The stamp duty system works in bands charging a rate based on the purchase price of the property as a percentage of the purchase price, these rates increase as the price of the property goes up.

Stamp Duty Thresholds

Purchase price of property Rate of SDLT
£0 – £125,000 0%
£125,001 – £250,000 1%
£250,001 – £500,000 3%
£500,001 – £1 million 4%
Over £1 million – £2 million 5%
Over £2 million 7%
Over £2 million bought by corporate bodies 15%

The consequence of this system is that, for example, a house costing £250,000 demands £2,500 of stamp duty to be paid, whilst one costing £250,001 is £7,500.03, basically 3 times as much. This is what creates the so-called ‘dead zones’ as demonstrated by research carried out by Zoopla whereby properties rarely get sold at prices just above each threshold and it creates a stack of sales at values just below the threshold.

Stamp Duty Dead Zones

Source: Zoopla

This chart shows that the system creates a clear irregularity in house prices and Zoopla actually claim that this has cost the Treasury £260 million in the last two years since prices are dropped to squeeze them in under the respective threshold. Some also regard the system as unfair given that higher property prices are both higher in value and have a higher tax rate so the overall amount paid increases exponentially.

The evidence speaks for itself in this instance and creates what economists would call an “imperfect market”. Proponents of reform suggest a fairer system would be one similar to how income tax is charged whereby the higher rates of tax are only applied to the amounts over and above each threshold so there are no sudden jumps in the amount of tax owed.

The second common complaint is that stamp duty is too expensive creating a lack of mobility in the housing market. The rates of stamp duty applied are not outrageous in themselves but the thresholds they apply to have not changed for many years. A recent report suggested that if the £250,000 threshold had risen in line with Land Registry house prices since its introduction in 1997 it would now stand at more than £800,000, so while house prices (and inflation to a lesser extent) have gone up, the thresholds have not budged.

Clearly the Treasury sees the proceeds from stamp duty as a valuable source of income so are reluctant to see this cash cow be cut. However we believe that, if this is the case, it is a rather short-sighted outlook. A recent study by Lloyds bank show that the average cost of moving in London in 2013 was £20,825 of which over half is paid in stamp duty and is just under half the average London salary of £43,866. Land Registry figures show that the number of transactions in the housing market has never properly recovered since the crash, there were 164,978 transactions in 2006 but only 109,740 in 2013.

What the Treasury needs to realise is that total proceeds from stamp duty are a function of both the rate charged and the number of transactions. If the rate charged was reduced and fairer then this might encourage more transactions thus maintaining a similar level or income whilst also going some way to resolving the lack of supply in the housing market; building new homes and selling them to foreign investors does not improve supply, encouraging homeowners to move and increasing mobility does.

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