Reform stamp duty to get the country moving again
Greg Hands (pictured) is MP for Chelsea & Fulham and a former chief secretary to the Treasury
The Sunday Telegraph’s “Campaign for Capitalism” is breaking new ground on making the case for the free market and free trade. One part of that is to increase ownership of assets, which includes homeownership.
Last week’s Budget was a missed opportunity to advance new reforms in stamp duty. Back in 2014, George Osborne did make some important changes.
Under the old “slab” system, the buyer of a property worth £250,001 paid three times as much as a property worth a pound less.
It was replaced with a more progressive “slice” system which was simpler and more equitable, and had the political attraction of making 90% of properties cheaper.
Later reforms designed to help first-time buyers have also been introduced, and this Budget cut stamp duty on shared ownership properties, all of which is welcome.
Nevertheless, punitive rates on properties above £937,500 have led to a sharp decline in the number of transactions.
Few politicians want to advocate lower tax on £1m homes, but, as this country learned in the 1970s, when Labour introduced income tax rates of 98%, punitive rates mean lower revenue, which means less money for vital public services.
As one estate agent in my Chelsea & Fulham constituency told me: “stamp duty is easy to avoid: just stay put”.
According to the Office for Budget Responsibility’s September commentary on public finances, receipts for stamp duty were down 10% in the year to date.
In their forecast accompanying the Budget, lower property transactions were cited as costing the Treasury £300m a year. This was in part due to a weaker London market – where the majority of properties being taxed at the upper end are located.
Stamp Duty Land Tax has social costs too. Here are just five.
First, it acts as a disincentive to downsizers. Fewer homes are put on the market, meaning fewer homes available for expanding families. Half-empty homes have become commonplace.
Second, it encourages an over-conservative approach to buying a home. Faced with the prospect of paying years’ worth of rent on stamp duty alone, many would-be buyers simply continue to rent. It has ushered in a high level of caution when buying: if there’s a chance you might move again for a job, to start a family, or for any other reason – you’re better off renting.
Third, it is a tax on social and regional mobility. It may also discourage moves into more productive or better-paid jobs if it involves relocation. Simply put, it is a tax on social mobility. It places a premium on moving up in the world.
Fourth, despite the system being designed to help first-time over second-home buyers, it frequently works out cheaper to buy a second home in a less expensive part of the country than to pay stamp duty on a larger primary residence in a more expensive one.
Imagine a family in my constituency in a three-bedroom house, expecting a third child, and debating the merits of moving. A four-bedroom house would likely cost them more than £150,000 in stamp duty.
That is more than the purchase price of the two bedroom cottage I lived in as a child in Cornwall (which would attract only £3,600 in stamp duty, even with the new penalties on second home ownership). It is thus cheaper to buy more space with a second home than to get a larger main residence. Is this socially desirable? I doubt it.
Fifth, when it’s often over 10 times cheaper to renovate than move, punitive rates of stamp duty encourage home extensions.
These can be anti-social, like basement excavations. A source of contention among neighbours, the over-development of homes also risks turning many parts of the country into building sites.
Returning to my example above, building a basement under a 3-bedroom house in my constituency will likely cost less than the stamp duty on a move into a four bedroom house. And the extension adds real value, not money to the taxman. Again, we are tax incentivising the wrong choices.
Falling revenue alone now makes it inevitable that the Treasury will have to take another look at stamp duty. Overall home ownership rates in this country are falling, and are now among the lowest in Europe.
Stamp duty land tax is a major part of this. It is time to consider the anti-social impacts of this tax too and to boost again rates of homeownership.
Now is the time for action.