Budget 2014 stamp duty reform could 'solve the housing crisis'

Changes to the levy could solve many of the problems with the housing market, according to critics

Experts have called on Chancellor George Osborne to reform the stamp duty system in his Budget on Wednesday.

Stamp Duty has created a distorted property market that is helping to exacerbate problems with high house prices and lack of supply, claim critics.

The levy, which raked in more than £4billion for the Chancellor last year, currently has a ‘slab-like’ structure.

Stamp duty is not paid unless a home is bought for more than £125,000, at this point a buyer must pay 1% of the property’s sale price to the treasury’s coffers.  

The levy then jumps from 1% to 3% after the property price hits £250,000 – tripling a tax bill from £2,500 to £7,500.

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The rate increases to 4% when a home is bought for £500,000 and 5% when the price is more than £1million. Homes bought for more than £2million pay the highest rate at 7%.

This is why the system causes a number of problems for both buyers and sellers:

Typical buyer now pays a ‘mansion tax’

Stamp duty at a rate of 3% on £250,000 was initially introduced in 2000, designed as a tax on the wealthier of buyers.

As house prices have increased, the 3% stamp duty threshold has remained unchanged. This means that more people have been pulled into paying higher rates of the tax.

The average house price reached £250,000 in December, according to the Office for National Statistics, so the typical buyer now pays the tax at a rate originally intended for the wealthiest of buyers.

The Government urgently needs to re-evaluate the threshold, says Naomi Heaton chief executive of property investors London Central Portfolio.

“Stamp duty was a tax introduced to generate revenue from the wealthiest of buyers. One could say it was the ‘Mansion Tax’ of the 90s but what equated to riches then, is no longer the case for 2013. A house worth £250,000 in 1997 would be equivalent to £716,000 today," commented Heaton.

As house prices are highest in London and the South-East the regional unfairness has also been raised.

More than two-thirds of home sellers in this area pay tax of 3% or more, found campaign group the TaxPayers’ Alliance (TPA).

Current system creates “dead-zones”

The steep jumps in stamp duty create a number of dead zones, which have lost sellers more than £260million, according to Zoopla.co.uk.

The website found that sellers who have a property with a value that falls just above a threshold are often forced to lower the asking price to secure a sale.

Since April 2012 it’s thought that some 37,266 sellers have undersold to bring prices below stamp duty thresholds, each losing an average £6,990 off the value of their home.

The number of sales in the price bands immediately before a stamp duty threshold is significantly higher than the level expected, while the number of sales in the price band immediately after a threshold – the stamp duty “dead-zone” – is significantly lower.


Lawrence Hall of Zoopla.co.uk said: “The current stamp duty system distorts the market and prevents thousands of sellers from achieving the full value of their property when they come to sell.

“An alternative system which removes the distortions is possible without reducing the revenue received via the Stamp Duty Land Tax.”

The levy currently stands in the way of first-time buyers

The sums required of buyers in stamp duty, on top of saving deposits of thousands of pounds, stand in the way of home ownership, according to campaign group the TaxPayers’ Alliance.

It said that more than a quarter of first-timer buyers are now faced with a ‘punitive’ tax bill of £7,500 of more, after falling into the bracket of 3%.

“Ministers have done nothing to ease the burden imposed by stamp duty, which is an unfair double tax that gets in the way of would-be first-time buyers and others thinking about moving,” said Matthew Sinclair, chief executive of the TaxPayers’ Alliance.

It blocks-up the property ladder

The high sums of money now commanded from stamp duty are also thought to put people off trading up or down.

This means that people are staying in homes not suitable for their needs - both at the bottom and top end of the ladder - contributing to a lack of supply of homes and helping to push prices up.

“Stamp duty is an unjustified burden on middle income families, especially in London and the South East. It is also preventing the proper functioning of the housing market, exacerbating the shortage of housing supply,” said Paul Smith of national estate agency Haart.

The answer?

Some experts feel that the current system should be graduated rather than creating sharp cliff-edges in duty. This approach “will mean some buyers pay slightly more than they would in the current system, but overall it will make for a fairer approach to taxing property,” said Zoopla’s Lawrence Hall.

Miles Shipside of Rightmove said: “Stamp duty has unfair thresholds, and a buoyant market could withstand some tinkering. It could raise a bit more revenue and remove the slab tax criticisms around the popular thresholds that are affecting more and more property purchasers as prices rise.”

Property investors LCP recommend moving the 1% stamp duty threshold up to £250,000. It said property prices would burst through the artificial cliff edge at £250,000, making transactions flow throughout the market.

“Should the band not be reassessed, there are two possible consequences.  Firstly, an even larger bunching will occur at £250,000, impeding the recent recovery in the UK housing market.  Secondly, some home owners will choose not to ‘trade up’, creating another hurdle for first time buyers getting onto the housing ladder,” LCP's Naomi Heaton.

Haart estate agency has said that sellers should be able to deduct the amount of stamp duty paid by their buyer from the stamp duty paid on their next home. It said this would help get the property ladder moving with people being more likely to trade up and down. 

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The so-called ‘stamp duty credit’ would make it easier for growing families to move, freeing up houses for first-time buyers, and would also provide an incentive for older homeowners to downsize to improve the supply of larger family houses.

While it wouldn’t help first-time buyers, they would be able to put the credit when selling towards their next home purchase.

But the Chancellor might not be too keen on this proposal, as Haart estimates it will reduce his revenues by half.

“However, this will be in part made up by higher housing turnover, which will increase VAT collected on purchases of new white goods, fixtures and professional services such as legal fees and removal companies. This in turn will provide more jobs and higher income taxes so the benefits are quite wide ranging,” said Paul Smith at estate agency Haart.

What do you think – should the Chancellor change the way stamp duty works?

21. London, UK: 7.5%

Price growth in the capital seems high when compared with the rest of the UK, but London doesn't even make it into the top 20 of areas where prices are growing fastest.... more 
21. London, UK: 7.5%

Price growth in the capital seems high when compared with the rest of the UK, but London doesn't even make it into the top 20 of areas where prices are growing fastest. less 
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Yahoo Finance UK | Photo by John Walton/EMPICS Sport
Fri, Jan 31, 2014 15:00 GMT