“Ultimately, more will still need to be done, even if stamp duty is cut for some.”
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“Stamp duty slashed in Boris Johnson no-deal budget” says a headline in today’s Times newspaper. It’s an interesting piece, and definitely worth a read.
The long and the short of it is that, as part of an emergency budget for a no-deal Brexit, Johnson is planning to reduce aspects of stamp duty. More specifically, he’s considering reversing recent stamp duty increases on more expensive homes as well as abolishing the levy on homes worth less than £500,000.
Leaving his other policies aside for a moment, this is welcome news.
How high stamp duty has impacted the U.K. market
The U.K. is hardly alone in the world in employing stamp duty. You can find some kind of property purchase tax all over the world – in most of Europe and in the US. We’ve had stamp duty, in its modern iteration, since the 1950s.
But it’s not a popular tax, and it’s certainly not a popular tax when the rates are as high as they are at the moment.
The most recent increases in stamp duty came through the last Conservative government when George Osborne was Chancellor of the Exchequer. In 2014, taxes on the most expensive properties rose from 7% to 12%. A couple of years later, a 3% additional charge was introduced, meaning that buying a second home worth more than £1.5 million was pinned to a 15% tax rate.
One of the major problems with these changes, and indeed, with high stamp duty in general, is that it massively hampers household mobility. The higher the rate, the more people the government prevents from moving house due to its cost. Buying and selling activity declines, the market goes into a semi-state of gridlock. An interesting research piece this year from Saga suggests that a quarter of would-be downsizers are put off moving because of the costs associated with doing so. Other studies have shown that even a marginal increase in stamp duty rates has a massive impact on household mobility; there are estimates that an increase of just two percentage points in stamp duty reduces household mobility by almost 40%.
Current stamp duty rates have particularly strangled the top end of the market. Especially in the capital where the average house price is disproportionately high, those looking to buy and sell are discouraged from doing so. Taking the average London house price of £992,802 according to Home, Londoners can expect to pay just over £43,000 if they want to move. They’ll be paying almost £73,000 if it’s buy-to-let or if it’s a second home. That’s certainly not an insignificant amount of money.
Fixing the problem
It’s crystal clear, whether you look back on sales volumes, or whether you look at tax receipts, that the increase in stamp duty originally imposed by George Osborne hasn’t proved effective.
The market simply hasn’t been able stomach the rises and the outlook doesn’t seem to be improving. Sales volumes continue to gradually decline, as does tax revenue; figures from HM Revenue & Customs show that total receipts for last year were nearly £1bn less compared to 2017.
The Conservatives have so far attempted to mitigate the impact of a sluggish market through a recent relaxation of planning laws. For a few, this will potentially mean they don’t need to move. But it’s an incomplete solution.
Slashing the top and bottom rates, as Johnson seems to be considering, will relieve the burden for some, and it’s a good start. But I suppose the real question is, “will it be enough to kickstart the sales market again” – a market that hasn’t been performing too well since the 2008 crash.
Perhaps the government can also look to reform help-to-buy, which has to date, only really helped house-builders. Allowing help to buy on resale properties, and allowing investment companies to set up property funds for help to buy are two ideas that initially spring to mind.
The government could also look to make deeper cuts on stamp duty across the board. That could be subsidised by land value taxes, for example. Like any tax it creates winners or losers, but this change would level the field and will help to stimulate all aspects of the market from first time buyers, families, downsizers and the high-end market.
Ultimately, more will still need to be done, even if stamp duty is cut for some. Brexit may be a whirlpool of an issue right now, but even so, the next premiership will need to take time to think about not only stamp duties, but the right way forward to stimulate growth in the real estate sector – the bedrock of a healthy economy.