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A modest proposal: cut stamp duty for homeowners by increasing it for property investors

Paula Higgins argues the case for a simple, yet urgent reform that would help homeowners and wouldn't cost the government a penny

October 5, 2013

As election fever escalates, the political parties are competing with proposals to either help – or get more money out of – homeowners. The Lib Dems have proposed a new mansion tax, the Mayor of London has called for a reform of stamp duty, while the Conservatives have brought forward their Help to Buy programme. The housing minister Mark Prisk admitted there was a strong argument to reform  stamp duty, but that the time wasn’t right.

The party conference season has shown that the decline of homeownership – highlighted in our report The Death of Dream – has made aspiring homeowners political flavour of the month.

We agree there are strong arguments for reforming stamp duty. As we showed in our report Stamping on Aspiration, the tax on homebuying has been ramped up so much by successive governments that it both massively slows down and distorts the housing market. In particular, it makes it far more difficult for aspiring first time buyers to get a home of their own.

But we have one particular proposal that would not only help aspiring homeowners and second steppers, and be very politically popular across the left and right alike, but it would be cost-neutral for the government. The idea is simple, and the reasoning unarguable: the government should cut stamp duty for aspiring homeowners and first time buyers, and pay for it by ramping up stamp duty on buy-to-let landlords, property investors and second home owners.

In short, there should be a lower rate of stamp duty for people who are buying their own home (known as their primary residential property); and it should be paid for by a far higher rate for those buying properties as investments or luxuries to use only on occasion (those for whom it won’t be their primary residential properties). At present, everyone pays the same tax when buying a flat or house, whoever they are and for whatever purpose they are buying it for.

The effect would be to use the tax system to tilt the property market in favour of the homeowner away from the investor and landlord. The tax system would then recognise the real social and economic benefits of being a nation of homeowners rather than a nation of renters. In London now, most households are now renting, and most new homes are bought by foreign investors (often before they are even built).

Stamp duty is a tax on buying a home now imposed at an average rate of around 3% of the price of the property. There are lower rates and exemptions for lower value properties – it is 0% up to £125,000 and 1% up to £250,000. There are good arguments for those lower rates – it helps first time buyers, and homeowners at the bottom end of the property ladder.

But why should foreign investors and buy-to-let landlords, and those buying second homes, also benefit from those tax breaks? Why should a property magnate or a Russian investor get the same tax breaks as someone wanting to leave their parents’ house and get their own place? There is no social or economic justification for it whatsoever. Those buying a property that is not going to be their main home should pay a flat rate of stamp duty on the whole property price – such as 5% or even 10%. The guilty secret of buy-to-let landlords is that they already get such extraordinary tax breaks (on mortgage interest, maintenance and depreciation) that they often pay virtually no tax at all compared to other investments.

Now, the tax experts among you will complain that this modest proposal might make perfect social, political and economic sense, but it requires the tax system to distinguish between those properties that are bought to be primary residential properties and those that are bought for other purposes. That makes for administrative difficulties for Her Majesty’s Revenue and Customs, and opens it up to fraud: why wouldn’t everyone pretend they are buying a house for their own main home?  But the tax system already distinguishes between people buying primary residential properties and those that don’t: capital gains tax is not paid when you sell your main residential property, but it is on other properties (unless, bizarrely, you happen to live overseas. Why do foreign property investors in the UK basically get triple tax breaks? There is no logic in the tax system. We do not need to encourage international investors to buy property in the UK). The Help to Buy programme also makes the same distinction. But also, fear of fraud is not a reason not to introduce a tax: you just make sure you tackle the fraud. No one argues that we should scrap tax on cigarettes because people can sometimes buy them virtually tax-less off a white van from Calais. The vast majority of property investors, buy-to-let landlords and second homeowners are law abiding people and abide by the new rules; just clamp down on those few that aren’t.

It is a simple reform that would help homeowners, be politically popular, wouldn’t cost the government a penny, and would help the economy and society. All we need now is the politicians – of all parties – to put it in their election manifestos.

Related reads

Stamping on Aspiration – a HomeOwners Alliance Report : The Full Report in PDF

Press Release

Diagram showing astonishing rise in stamp duty


See what the Guardian and the Daily Telegraph had to say

For other blogs on stamp duty click here, or here for our latest blogs

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