24 April 2019
Could a radical rethink on an ancient tax be a straightforward answer to a modern problem? Could we ease the problems of the housing market, and boost the economy, by replacing stamp duty with an annual property tax?
New solutions needed for an old problem
The lack of affordable housing is a topic that I have dealt with in previous blogs. It’s a familiar subject and gives rise to many theories as to the causes and solutions. Successive governments have attempted to solve these problems with only limited success, the main outcome being a rise in taxation for residential landlords. Perhaps it is time for a more radical approach.
Variations on an outdated theme
Stamp Duty Land Tax [SDLT] started life in 1694 as a levy on transactions documented on vellum or paper and the amount charged was not originally related to the value of the transaction. It was as recently as the 1950s that it came to apply to house sales and did not appear in its current form until 2003. Currently it only applies to property sales and dealings in company shares.
In recent years it has been modified to try to loosen up the housing market. Prior to December 2014 the rate of tax was determined by the price of the property and the whole of the transaction was taxed at that rate. So, for example, a house that just breached the threshold of £500,000 would be taxed at 4% on the entire consideration, whereas one sold for £499,000 would attract tax at 3%. Thus a price increment of £1,000 would increase the tax by £5,030. This clearly caused market distortions.
Since then a more logical sliding-scale has applied, whereby the first £125,000 of any transaction is taxed at 0%, the next £125,000 at 2%, etc. The highest rate of 12% applies to consideration in excess of £1.5m. More significant, perhaps, is the exemption from tax for first time buyers whose property costs less than £500,000.
The good points
The advantages of SDLT, from a government point of view, is that it is relatively cheap to collect, quite difficult to avoid or evade, and is reasonably progressive – i.e. it tends to collect more tax from those with more wealth.
Time to unblock the log-jam...
By other economic measures, however, it does not fare so well. One yardstick applied to taxes by economists is efficiency. An efficient tax is one that collects revenue whilst having the least possible effect on the behaviour of taxpayers. This applies generally to taxes on income because most taxpayers will not be deterred by tax from trying to increase their income.
SDLT does however significantly affect taxpayer behaviour. It dissuades people from moving home, thereby constraining labour mobility and holding back productivity. It slows down the housing market, and even though the exemption for first time buyers is welcome, its effects are countered by a trickle-down effect from taxes applied to homes higher up the scale.
Data from various sources indicate that about 40% of the UK’s housing capacity is owned by people over the age of 65, and that one third of owner-occupied homes have two or more spare bedrooms. A survey carried out by the Rural Housing Policy Review concluded that 6.8 million homes were owned by over 60s who were interested in downsizing and that the main obstacle was SDLT. It suggested that if only one half of these households were able to move this could free up 18% of the UK’s housing stock.
…And plug the gap
In 2016/17 SDLT raised £13.95 billion out of a total Treasury tax-take of £694.69 billion. Obviously complete abolition would leave a significant hole in the public purse. Arguably some of this might be recouped by the boost to the economy resulting from taking off the SDLT brake, but there would remain a gap to be filled by other taxes. Some economists recommend an annual tax on the ownership of land. Although unpopular, like any new tax, the concept is familiar; most of us already pay Council Tax. And such a tax, in the absence of SDLT, would be an incentive to downsize. This could be a bold reform that deserves a place on the political agenda.
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