Special Feature: Will Stamp Duty replacement be fair?
There has been much coverage recently of a replacement for Stamp Duty finally approved by the Scottish Parliament last week amid claims that it will be ‘fairer’ than the tax it replaces.
The idea behind the new tax is admirable. A graduated tax in which you pay a higher rate of tax only on the part of the purchase price above a certain level is clearly better than the current ‘slab’ arrangement by which you pay a higher rate of tax on the whole purchase price once you get above a certain threshold.
Estate agents and think tanks have both been arguing in favour of such an approach since the current Stamp duty land tax (SDLT) was introduced in 2003. Moreover, it only goes to show that it can be done if you put your mind to it.
But, it is not necessarily the case that it will be ‘fairer’. Under the current proposals published by the Scottish Government in their consultation document almost everyone buying for between £200,000 and £300,000 could face steeper rises in tax than is desirable.
It’s all down to the tax rate applied and the number of tax bands that are introduced. The Scottish Government consultation assumed a 7% tax rate applied to the amount buyers pay over £180,000.
If that is applied in real life, anyone buying a house for between £210,000 and £249,000 will pay more than they currently do. These are not the mansion buying rich, but people who are buying typical family homes.
Even those buying a property between £250,000 and £300,000 will face a steeper hike in tax than would be necessary if the government applied the tax to a wider range of property values.
The solution is to introduce more tax bands. Indeed, the Scottish Government considered an entry level tax band of 2% (up to £250,000) followed by a higher band of 9.5% for properties above £250,000 but has been surprisingly quiet about it recently.
That seems to have been abandoned because the entry level tax band would have to be applied to cheaper properties (sold for over £125,000) to generate the same revenue.
But a 2% tax on the sale price above £125,000 is not going to be a large figure for most buyers. Someone buying a house at £150,000, for example, would pay just £500 in tax, £1,000 less than they would pay today.
A lower threshold for the tax together with a low tax rate would give a smoother increase in tax as property values increase with fewer sudden leaps and the great majority of buyers paying less than they currently would.
So, whether a reformed version of SDLT would be desirable in the rest of the UK depends crucially on the tax thresholds and the tax rates applied.
It’s a good idea in principle, but whether it will be fair to mid-market buyers depends on how the government sets the tax rates.