23 October 2018
Stamp duty is a big-hitter for the Government, but could further reform be a smart move? Daniel Lyons, our Head of Tax Policy, considers the pros and cons.
With the Chancellor looking to fund a cash injection in the NHS, signs are now emerging that nothing’s off the table in this month’s Budget. And when it comes to tax, reform can be as fruitful as rate rises.
Stamp Duty Land Tax (SDLT) – widely referred to as stamp duty – is payable on house purchases over £125,000 in England and Northern Ireland. Following devolution, Scotland and Wales now have similar taxes – the Land and Buildings Transaction Tax (LBTT) and Land Transaction Tax (LTT) – payable on purchases over £145,000 and £180,000 respectively. Stamp duty has existed in some form since the 1690s, but far from being accepted as a sensible way to redistribute wealth, this much-maligned levy must now rank among Britain’s least popular taxes.
For what it’s worth
You can’t deny its worth though. Thanks largely to inflated house prices in pockets of the country, new brackets for higher-value properties and the additional charge on buy to let homes, HMRC figures show SDLT added £12.9 billion to the public purse in 2017/18. Up from £2.1 billion a decade ago, that’s more than alcohol duty (£11.4 billion), capital gains tax (£7.8 billion) and inheritance tax (£5.2 billion).
In today’s market, a simple two-up, two-down in the South East could easily reach the half-million mark, meaning a hefty £15,000 bill if the owners move to pastures new. And that’s part of the problem; it’s a tax on perceived rather than actual wealth that hits some harder than others.
The Government has tried to make it fairer and last year’s decision to scrap the duty for first-time buyers spending up to £500,000 gave Generation Y a hope of home-ownership. Figures from the second quarter of this year show around 52,400 people benefited. The Office for Budget Responsibility (OBR), however, predicted the move would simply push up house prices. A rethink of the ‘slab system’ in 2014 removed the massive spikes between thresholds and cut the bill for the average UK residential property, from one percent to 0.7 percent. Although, more recently, that burden has started to creep up again.
Tax up, sales down?
But putting accusations of inequality aside, does the tax work? Many would say no. SDLT is often branded inefficient because, when the bill’s too steep, it can stop people moving, including for employment. And research by the London School of Economics suggests this takes its toll on the job market and UK productivity.
In Australia, a study of stamp duty rates – which vary between state and territory – revealed a 10 percent rise in the tax reduces the number of homes sold by three percent in the first year and six percent over three years. Another short-term impact is a three percent fall in house prices.
And emerging research from Deloitte points to a similar scenario for England and Wales, but on a smaller scale due to the lower SDLT burden on the average property in England compared to Australia. A 10 percent hike would see a drop in residential property sales of 0.2 percent, and a 0.1 percent fall in prices. That might not seem much, but it does suggest that getting rid of SDLT could help boost house sales, support employment and raise productivity over time.
SDLT revenues are volatile and hard to forecast as they’re heavily concentrated in certain regions – London being the obvious one. According to the OBR, Westminster and Kensington & Chelsea make up around 0.01 percent of the UK’s geographical area and are home to less than one per cent of the population. In 2014/15, however, 10,000 transactions in these two boroughs accounted for £0.9 billion, or 12.5 percent of UK residential SDLT receipts. I can’t help but think it’s a case of too many eggs in one basket.
On the plus side…
But there are two sides to every story and SDLT does have its advantages. Not only is it a reliable revenue-raiser for the Exchequer and highly progressive, you could argue that it deters buy-to-let landlords so encourages home ownership. There are also suggestions it could be used in the Budget to tax foreign buyers and raise tens of millions to help the homeless.
The debate continues, with many alternatives being put forward. There’s replacing SDLT with some form of capital gains on homes, with relief available for improvements or repairs. A more radical approach would be a recurrent land or property value tax. This recommendation is supported by Organisation for Economic Cooperation and Development (OECD) research that points to it being among the most efficient forms of levy on immovable property. Think tank and lobby group The Adam Smith Institute has advocated a revision of existing Council Tax bands.
Tax reform will not solve all the UK’s property problems but, whether in this Budget or another, it’s a pretty safe bet that SDLT will come under the Government’s microscope once again. As safe, you might say, as houses.
Head of Tax Policy, Deloitte LLP