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How Britain's oldest tax is stifling the housing market

·5-min read
 People looking at house price signs displayed in the window of an estate agents in Lewes, East Sussex, as the Office for National Statistics (ONS) has said that the average UK house price has surged by £24,000 during the past year of coronavirus lockdowns. Issue date: Wednesday May 19, 2021. - Yui Mok/ PA
People looking at house price signs displayed in the window of an estate agents in Lewes, East Sussex, as the Office for National Statistics (ONS) has said that the average UK house price has surged by £24,000 during the past year of coronavirus lockdowns. Issue date: Wednesday May 19, 2021. - Yui Mok/ PA

Britain’s oldest surviving tax could be one of the most suffocating for the economy.

First introduced in 1694 by William of Orange as he tried to raise money to fund his war with France, the scope of stamp duty has changed dramatically in the three centuries since but survived in some form.

Initially, it was intended to only entangle the most expensive houses but has now been harnessed as a cash cow for the Chancellor that almost every mover pays, particularly as prices surge.

While stamp duty land tax (SDLT) has impressive longevity, economists on both sides of the political spectrum are in agreement it is a distorting tax that could be worsening Britain’s housing crisis by stifling activity.

Though it is raising record amounts of revenue for the Exchequer, are the economy and homebuyers paying the price for not scrapping stamp duty?

“Economists are pretty much agreed that this is a bad tax and some kind of ongoing property tax is a much better tax,” says Kath Scanlon, deputy director at LSE London.

“It used to be the case that the average buyer purchasing the average house would not be liable for stamp duty land tax anywhere.

“That is definitely not the case now. It would be almost impossible to buy any property in London that wouldn’t make you liable for SDLT.”

The Chancellor raised £14.1bn from stamp duty in 2021/22, more than double the amount generated a decade ago and the highest on record. It accounted for 2pc of all tax revenue last year compared to 1.3pc in 2011/12, raising almost as much as capital gains tax and more than all alcohol duties combined.

Lucian Cook, head of residential research at Savills, says: “It has been an incredibly effective means of raising revenue but it's also been an increasingly effective policy tool to achieve some of their housing goals.”

He says this has helped to give younger first buyers “a competitive advantage in the market” with a reduced tax rate or to “charge additional rates for investors and second home buyers”, deterring them.

The Exchequer has raked in revenue from the pandemic-induced surge in property prices, a result of Rishi Sunak’s stamp duty holiday that not only propped up the housing market through Covid but caused a flurry of transactions.

Official figures indicate that house prices have jumped 20pc since the start of the pandemic. Meanwhile, the stamp duty bands have returned to their pre-Covid levels, meaning more of the transaction is caught up in higher tax bands when a property is sold.

The average property in Britain paid £2,100 in stamp duty before Covid but the property price boom has pushed it up to £3,800.

While higher property prices have helped, decisions to widen the scope of the tax in recent decades have also made it a big money earner.

In the 1980s, there was just one stamp duty band with homebuyers paying a 1pc tax on properties worth £30,000 and above. The average property price was just under £26,000 in 1984, meaning the majority of transactions were not caught up in the tax.

However, there are now four bands with homebuyers beginning to pay a 2pc rate from £125,000 upwards.

That is well below the current average home price in the UK of £277,000 and disproportionately impacts London and the South East where the housing crisis is at its most acute. The tax hits 10pc for properties above £575,000.

Sam Robinson, senior research fellow at think tank Bright Blue, says: “We've been seeing quite a few properties pushed into new stamp duty brackets as a result of a rise in house prices.

“It does lead to quite a different world for first time buyers. Given that the buyers pay stamp duty, this is a worsening problem for people wanting to get into the housing market.”

Heavy taxation of property transactions is stopping Britons from moving and - crucially - keeping them in homes that are the wrong size, deepening the housing crisis. Think tanks from both the left and right have proposed scrapping stamp duty while the idea has gained traction with some MPs on the Tory backbenches.

“A tax on any activity tends to reduce the frequency of that activity,” says LSE London’s Scanlon. “People who gain the most from avoiding [stamp duty] are people who live in big houses, people who live in valuable houses, people who live in London and the southeast, so basically potential downsizers.”

Economists believe the housing crisis could be eased at least partially if people were able to move out of unsuitable homes, freeing up supply.

Many older people are in three or four bedroom homes designed for families but stamp duty deters these so-called “empty nesters” from selling up when their children leave.

Scanlon says this stops these properties being used “more efficiently”. He argues that a fundamental reform that brought in an annual property tax would help to disincentivise people from staying in homes larger than they might need.

“That would change the dynamics of the incentives so that you would be basically paying to remain in your big house but you pay less if you move to a small house.”

Bright Blue’s Robinson adds that scrapping stamp duty would allow people to move around the country more, relocate for jobs and use the current housing stock in a more efficient way.

Scrapping stamp duty might be able to help alleviate Britain’s housing crisis but few Chancellors will be willing to give up such a lucrative cash cow.

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