Stamp duty is hurting the economy – not just the housing market
If we accept the premise that governments should not tax the activities they want to encourage, then Britain’s stamp duty regime seems very strange.
The Government has dropped this transaction tax for first-time buyers but kept it for subsequent home purchases. Should we assume the Government wants people to remain living in their starter homes forever?
The UK has an ageing workforce and not enough young people to pay for the pensions of the retiring generation. The obvious solution is to encourage greater family formation, but applying stamp duty to family homes is discouraging this and ensuring the economy continues to rely on immigrant workers.
This problem is greatest in London and the South-East where property prices are higher, but also where many of the UK’s jobs are based.
If we want people to work, pay their taxes and have families, we need to stop adding transaction taxes to primary residences regardless of whether it is someone’s first home purchase or their hundredth.
According to Land Registry data, the average price of a London semi-detached house is £690,767. A couple buying such a house today would have to be prepared to give the Government £22,038 in stamp duty, as well as find the 20pc deposit and meet the higher cost of their mortgage payments, simply for wanting to have the children that our economy so badly needs.
If the couple has the 20pc deposit and can raise a mortgage valued at five times their income, then £22,000 would be more than their combined annual income tax payments.
How does the Government justify charging people an extra year’s income tax for wanting to start a family in a London semi?
In 2022/23, residential Stamp Duty Land Tax raised a whopping £11.7bn from people simply moving house. London and the Southeast property owners paid over 60pc of the total, despite accounting for less than 30pc of the transactions.
There are other transaction costs when buying property: conveyancing solicitors, mortgage valuers, surveyors and estate agents, but unlike stamp duty, all of these professionals offer a service for their more moderate fees.
Stamp Duty was also once a moderate fee of only 1pc for properties over £60,000 and justifiable for providing a formal register of property ownership.
Property rights are the backbone of our economic system, so having a government register of who lawfully owns a house is beneficial to all property owners.
If people don’t believe their ownership rights are registered and protected by law, they will be unlikely to invest in property. But the present stamp duty rates are far above the cost of running the Land Registry.
Gordon Brown changed stamp duty from a registration fee to a revenue raiser and increased the number of bands and the rates each year from 1997 to 2000 when properties over £500,000 paid 4pc tax.
Then George Osborne turned it into an envy tax on family homes in London and the Southeast, increasing the top rate to 5pc in 2011, then to 7pc in 2012.
In 2014 Osborne changed the calculation to a marginal system, with rates increasing from 2pc for the portion of a property’s value between £125,000 and £250,000, to 12pc for the portion above £1.5m, with an additional 3pc for second homeowners.
The Government has since dropped the lowest 2pc charge but added a further 2pc surcharge for non-UK resident purchases of UK residential properties.
Osborne’s 2014 increase came at a time of ultra-low interest rates when many people were investing in property as an alternative to interest-rate products. But those days of ultra-low interest rates are over and are unlikely to return. So why do we still have ultra-high stamp duty rates?
I can sympathize with the desire to discourage limited London housing from becoming empty money boxes for high net-worth foreigners who are unlikely to live here and merely use London property as a safe store for their wealth. However, taxing London families out of the city is counterproductive.
London needs people to live and work and be able to afford to have children here. It is already an expensive city to live in, and cutting stamp duty on primary residences would make it that much easier for families to stay in the city. By all means, keep stamp duty for non-residents.
Some Conservative think-tankers believe that homeowners are more likely to become Tory voters and so have recommended that successive conservative governments encourage homeownership.
Most recently this has been done by exempting first-time buyers from stamp duty on properties below £425,000.
However, an angry electorate, stuck in houses that are now too small for their needs because of the high cost of second-time buyer stamp duty, is unlikely to increase Conservative party support.
But the problem is much more serious than people not voting Conservative. The generation of young couples priced out of the market aren’t starting families, which is leading to a demographic time bomb.
Another discouraging tax on an activity that the Government should be encouraging is stamp duty on share transactions. A tax that is very hard to defend.
The Government doesn’t keep the share registers and it doesn’t own the stock market or the trading platforms, so how do they justify this charge?
Stamp duty discourages people from investing in company ownership and pushes them towards spread betting and contracts for differences instead.
This isn’t good for economic growth, corporate fundraising or corporate governance which is left to large investors or their proxies.
This tax, charged at 0.5pc to 1.5pc, doesn’t even raise much money considering London is one of the world’s largest financial hubs.
Stamp taxes on shares and other liable securities amounted to only £3.8bn in the 2022/23 tax year, about a third of the amount raised from housing.
There is no reason for the Government to take a bite out of people’s capital with upfront stamp duty charges. If an equity investment makes a profit, the investor will pay capital gains tax.
But if the transaction costs discourage people from investing in the first place – then HMRC will miss out on both.
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