Focus on the budget: why stamp duty needs reforming
18 MARCH 2014
The Chancellor of the Exchequer will announce his Budget amid the usual calls for a reform of Stamp Duty Land Tax. As it stands, this tax significantly distorts the housing market, while also making life even tougher for cash-strapped first-time buyers.
Stamp duty isn't going away and tinkering around the edges will move the problem elsewhere. Taxing someone for working hard to earn the money to buy themselves a home seems grossly unfair, and counter-intuitive – especially when they’ve already paid tax on their income.
The tax should be removed altogether for first-time buyers and swapped from being a purchasing tax to a selling tax. There is strong evidence that transaction levels have been markedly affected since Labour introduced new brackets in the late 1990s. A measure designed to slow down the market has had the opposite effect, with everyone piling into the sub-£2m market, including investors. This has deprived first-time buyers and domestic buyers of housing stock more than ever before.
Despite the Government’s assurance that it wants to reward aspiration, stamp duty does precisely the opposite, firmly acting as a deterrent to those wanting to improve their lot.
Stamp duty should also be ‘backloaded’ so the wealthy pay the most but on an incremental basis. For example, a £2.5m sale would mean no stamp duty on the first £1m, then 1 per cent on the balance between £1m and say £1.5m, plus 2 per cent on the balance between £1.5m and £2m, plus 3 per cent on the balance between £2m and £2.5m etc. It is right that wealthy property owners should pay more, but the current system which means that paying £1 over a stamp duty bracket can suddenly add thousands of pounds to your tax bill is entirely wrong – it should be graded quite differently.
We often see that properties 'worth' slightly more than a stamp duty bracket can be harder to sell, especially the £2m mark where the rate jumps from 5 to 7 per cent. Not much is advertised between £2m and £2.2m, while £2.25m seems sufficiently above the £2m bracket that buyers are unlikely to use the stamp duty issue to try and squeeze the vendor.
When the 7 per cent stamp duty bracket was introduced, the number of £2m+ sales in London dropped by as much as a third, but after a year it was old news and generally accepted. It has put increased focus on the sub-£2m bracket and in times of austerity, persuaded people that spending £1.5m for a small house in Fulham is better than spending £2.5m on a two-bed flat in Chelsea. This is one of the reasons why southwest London has become so much more desirable in the past year.