Charcol offers pre-Budget submission on stamp duty land tax

Amanda Jarvis

November 24, 2004

Ray Boulger of Charcol comments: “We hear frequently that the government is keen to remove all inequality in the tax and benefits systems, but actions speak louder than words and the current structure of stamp duty land tax is grossly unfair. Abolishing this tax is clearly a non-starter and so Charcol would like to see it reformed to reflect the way income tax is structured.

With income tax, the higher percentage rates of tax are only payable on the amount of income over certain thresholds. However, with stamp duty land tax, once you reach a certain level, borrowers are forced to pay the higher percentage on the total amount.”

A buyer wants to purchase a home priced at £250,001. They would currently have to pay 3% in stamp duty tax for this property, a total of £7,500. Yet if they bought that property for £250,000, they would only pay £2,500. Thus a £1 increase in the price results in a tax increase of £5,000.

Boulger continues, “Stamp duty has become more of a key issue for many potential first time buyers. The proportion of loans made to first time buyers has been steadily falling for 5 years. In 1999 first time buyers accounted for 47% of all loans, according to figures from the CML. However, this figure has since fallen sharply, and this year is under 30%. A lack of first time buyers reduces liquidity in the market and addressing this issue should now be a priority for The Chancellor. Less liquidity means fewer transactions and fewer transactions means less tax for the Chancellor! For many potential first time buyers stamp duty land tax is one burden too many in preventing them from buying their first property and this unfair tax is ripe for reform.”

Although abolishing stamp duty land tax for first time buyers up to a higher limit than for other purchasers may at first sight appear to be the simplest way to help this beleaguered species, the practicalities of identifying genuine first time buyers would make such a scheme difficult to police. The simplest and fairest solution, which would help all purchasers but would
help first time buyers the most, would be a combination of substantially increasing the thresholds to reflect property price inflation and making the tax fairer as outlined above.

The threshold for stamp duty land tax was last increased to £60,000 in 1993. Adjusting for property price inflation since then would mean increasing this threshold to around £170,000*. The other thresholds of £250,000 and £500,000 would obviously also need to be increased, or possibly amalgamated and then a new higher threshold created.

With the average residential property price in the UK now around £188,000 according to The Land Registry (although the average price paid by first time buyers is less), even a 5% deposit equates to £9,400 up front. Stamp duty land tax at the current rate adds an extra £1,880 to costs and that can sometimes mean the difference between buying that first home or not.

With the proposal outlined above the tax payable on the average priced property would be reduced by over 90% to £180 (1% on the difference between the £188,000 purchase price and a £170,000 starting price for stamp duty land tax).

Boulger concludes, “To avoid this type of stealth tax creeping up on us again we would like to see a clause in next year's Finance Bill emulating the Rooker-Wise amendment to the 1977 Finance Bill, ensuring that the thresholds would change each year in line with inflation. A sensible
starting point for the 1% band would be the average property price, based on Land Registry figures (i.e. currently £188,000), and the annual inflation adjustment (up or down) should also be based on Land Registry figures.”

*Based on the average increase as recorded by the HBOS and Nationwide House Price Statistics.

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