Stamp Duty Reform – 8 recommendations
The time has come for a fundamental rethink of stamp duty.
Recommendation 1: The government should raise all the thresholds for stamp duty annually in line with house prices
Justification: The powerful “fiscal drag” effect resulting from the government’s freezing of thresholds means that rising property prices will push an ever increasing number of houses into being liable for higher stamp duty rates. This will guarantee that the higher rates of stamp duty will become the norm, and the lower rates the exception. There is no economic rationale for a property that incurs a 1% tax one year incurring a 3% tax a year later when it is resold. The government should aim to stabilise the stamp duty rates for individual properties by increasing the thresholds in line with rising house prices. The government already does the same for thresholds in income tax, and it should copy that for stamp duty.
Recommendation 2: The stamp duty exemption threshold should always be above the average house price, so that ordinary homebuyers don’t pay
Justification: Over the last twenty years, stamp duty has gone from a tax that ordinary homeowners don’t have to pay, to one that affects most homebuyers. The average person struggling to realise their ambition of owning the roof over their head should not be hindered by having to pay tax to the government. The government can make sure that doesn’t happen by ensuring the tax exempt threshold is above the price of the average property, as it has been in the past.
Recommendation 3: Stamp duty should be decreased for those buying primary residential properties, paid for by increasing the rates for those buying second properties or buy-to-let properties
Justification: People buying their main home, buy-to-let landlords, property companies and domestic or foreign buyers looking for second or third properties currently all pay the same stamp duty. This is inconsistent with the government’s aim of promoting homeownership, which brings wider social and economic benefits. The balance of taxation should be tilted away from those just wanting to buy the roof over their head, and towards those for whom property is an investment or a luxury. People should pay lower rates of stamp duty if they are buying their primary residential property than any other category of buyer.
Recommendation 4: Buy-to-let landlords and buyers of second properties should pay a flat rate stamp duty on the whole purchase price regardless of the price of the property, with no exemptions
Justification: There is no social or economic reason to have lower rates of tax or total exemptions for those buying properties as investments or for those who already own a home. Those lower rates and exemptions are there to help people at the lower end of the property ladder realise their ambition of owning their own home; there is absolutely no justification for property investors or those with multiple properties to benefit from them. Buy-to-let landlords and buyers of second properties should be made liable to a flat rate stamp duty (such as 5%) on the whole purchase price regardless of the price of the property. This will generate considerable extra revenue to help pay for the reductions in stamp duty for those buying their primary residential property.
Recommendation 5: The stepped, slab pattern of stamp duty should be replaced with a rate that is only applied above the threshold rather than the entire value of the property
Justification: The slab pattern of stamp duty (where the rate is applied to the entire value of the property) is well documented as causing major distortions to the property market, with house prices clustering below the rather arbitrary thresholds. That clustering is clearly detrimental to efficient allocation of limited housing resources. But as we have shown in this report, the slab pattern also leads to a massive multiplying of the fiscal drag of stamp duty, with a small increase in a house price potentially causing multiple increases in tax liability. Instead, stamp duty should be applied on the same basis as income tax, with the new tax band only being applied to the amount above the last threshold, rather than to the entire amount of the property. This would bring stamp duty in line with how income tax is calculated, a much fairer system. So a house costing £300,000 would be liable for 0% on the first £125,000, 1% on the next £125,000, and 3% only on the last £50,000.
Recommendation 6: First time buyers should be exempted from stamp duty on a permanent basis
Justification: Homeownership is in historic decline, falling to the lowest levels since 1988, and depriving 5 million people of their aspiration to own their own home. Young people are finding it almost impossible to get a foot on the property ladder, as a result of both high house prices and the high deposits required. First time buyers are the most vulnerable in the property market, because they have not built up the equity needed, and have to save up to cover all costs. The government should not tax those who are trying to buy their first home.
Recommendation 7: The government should consider transferring stamp duty from the homebuyer to the homeseller
Justification: Stamp duty is unusual as a transaction tax in that it is paid by the buyer rather than the seller – VAT and excise duty on petrol, alcohol and tobacco are collected by the seller. House sellers are generally in a better position to afford paying stamp duty than buyers as they have generally
built up more equity. Making sellers pay stamp duty rather than buyers would automatically exempt all first time buyers, and cost the government no loss of revenue. It is likely that stamp duty would to some extent be factored into house prices by the seller (just as shops factor VAT into retail prices), but buyers would find it easier to take out a mortgage to cover that extra cost than save for stamp duty, which is what they have to do at present.
Recommendation 8: Stamp duty receipts should be invested in housing where there is the demand
Justification: There is a strong consensus across the political spectrum and industry groups that the UK is in the grip of an acute housing shortage, which is making housing unaffordable. The government needs to invest the money made from stamp duty tax to build more homes.