As someone who has been banging the drums for a reduction in stamp duty for many years, it would be remiss of me not to welcome the news that this poor tax may be axed.
Regardless, when reports emerged on Friday that stamp duty cuts could be the rabbit in the hat in Liz Truss and Kwasi Kwarteng’s mini-budget, I thought: ‘What? Why?’
It’s not necessarily the best time to cut stamp duty: house price inflation is in double digits, we’re still recovering from the ill-chosen tax holiday that fueled the pandemic, and the Bank of England is busy raising interest rates to try to ease the stifling economy.
But then, a bad tax is a bad tax, and if you’ve been waiting a few decades for someone to be brave enough to do something about it, maybe you can’t complain about the timing.
Will stamp duty be reduced soon? This week there were rumors of a mini budget cut in property tax
There is a caveat to this support, but we need to learn from the ghosts of stamp duty holidays past and reduce tax on moving homes permanently.
Stamp duty is a bad tax because it prevents people from moving home, it creates a huge barrier and psychological pain, thus inhibiting economic movement and helping to destroy an already dysfunctional housing market.
This is an unusual tax on property price growth that is not paid by the seller who has made a profit, but by the buyer who has to work hard to cash it in.
The biggest financial pain is felt by those unlucky enough to buy in parts of the country where a roof over their head costs the most, as stamp duty hits areas where house prices are higher (which, it bears repeating, is not a good thing for the buyer).
It also discourages those higher up the property chain from selling and moving, reducing supply near the top, which then pushes prices all the way down.
Also, stamp duty is regionally regressive, because it’s already much harder for someone from places where house prices are lower to raise the capital to move to another part of the country where they’re higher – and then they have to find an incredibly great piece of tax on top of that .
Some of these things are illogical; you can easily argue that those in more expensive areas are better able to pay, that the buyer has a set budget, including deposit, taxes and other costs, and is working towards it, and that the real estate flow economy doesn’t work.
That said, I’d argue that most people don’t want to hand over thousands or potentially tens of thousands of pounds to the government in housewarming tax more times than absolutely necessary – and that’s why stamp duty is a problem.
I know I would at least move home again if stamp duty wasn’t so high, and I know many other individuals and families of my generation for whom this is true.
|Band||Own domestic stamps||Buy to let
and other homes
|125,001-250 thousand pounds||2%||5%|
|250,001-925 thousand pounds||5%||8%|
|£925,001 – £1.5m||10%||13%|
|£1.5 million +||12%||15%|
|* Stamp duty is not payable on property transactions costing less than £40,000 as these are considered low value and are not reported to HMRC.|
The stamp duty need not be so high. We got by quite well with a simple flat 1% property tax until 1997 when Gordon Brown started to interfere.
There’s no reason why we can’t admit that the great stamp duty experiment was a mistake.
This 1 per cent was levied on all homes costing more than £60,000 and stamp duty was not considered a problem or a major barrier to buying.
Then – to cut a long and complicated story short – Chancellor Brown cashed in on his property boom by adding extra thresholds, Chancellor Osborne removed the odd slab system but couldn’t resist trying to soak up rich middle-class commuter families , and Chancellor Sunak were included in the temporary leave, which added fuel to the flames of the real estate pandemic
The problem with trying to turn stamp duty from a bad tax to a not-so-bad tax is that we’re not starting from a great place.
The potential gain for any theoretical homebuyer from the tax cuts is disproportionately skewed towards those buying the most expensive homes, who obviously tend to be wealthier. First-time buyers don’t stand to gain much as the exemption already takes away most of the tax. This has made it difficult to sell meaningful cuts for years.
The home price-to-earnings ratio continues to rise, with prices now exceeding 7 times average earnings, well above the long-term average of 4.5.
Meanwhile, house prices are at record levels against wages and there are fears that the stamp duty cut will push them higher.
However, it’s important to note that much of the bullish response to the idea of a cut is based on hip holidays, and that a permanent cut is potentially very different from a temporary time-limited one in terms of market distortion.
Stamp duty cuts also risk a dose of push-me-pull economics. The Bank of England is rapidly raising interest rates to fight inflation, raising borrowing costs to dampen demand and slow the economy. A reduction in stamp duty takes fiscal policy in the opposite direction.
But there is an argument that lowering the lump sum barrier to buying a home – in the form of a deposit and stamp duty – while limiting the amount people can borrow at higher mortgage rates might not be a bad thing.
Keeping home prices down with higher interest rates while lowering the tax paid to buy a home? I’ve seen people work towards it, whether it’s a plan or achievable is another matter.
Some of the links in this article may be affiliate links. If you click them, we may earn a small commission. This helps us fund This Is Money and keep it free. We do not write articles to promote products. We do not allow any business relationship to influence our editorial independence.