A stamp duty cut may sound crazy now, but it’s a bad tax due for revision

Update: Chancellor Kwasi Kwarteng announced a stamp duty cut in the mini-budget, but homebuyers hoping for a major overhaul will have been disappointed, as I certainly was.

> Stamp duty reduction: How much will you pay now and save?

As someone who has been beating the drum to reduce stamp duty for many years, it would be wrong for me not to welcome the news that I might be about to take an ax for this bad tax.

However, when reports surfaced that a stamp duty cut could be the rabbit in the hat in Liz Truss and Kwasi Kwarteng’s mini-budget on Friday, I thought: ‘What? Why?’

It’s not necessarily the best time to cut stamp duty: house price inflation is in double digits, we’re still recovering from an ill-timed tax holiday that fueled the pandemic boom, and the Bank of England is busy raising interest rates to try to cushion the economy.

But then, a bad tax is a bad tax and if you’ve waited a couple of decades for someone to be brave enough to do something about it, maybe you can’t complain about the timing.

Is the stamp duty about to be reduced? Rumors surfaced this week of a mini-budget reduction in the property purchase tax

There is a caveat to that support, however, we must learn from the ghosts of stamp duty holidays past and reduce the tax on moving house permanently.

Stamp duty is a bad tax because it prevents people from moving house by creating a major hurdle and psychological pain point and thus inhibits economic movement and helps wreck an already dysfunctional property market.

It’s a strange tax on property price gains, paid not by the seller who has made a profit, but by the buyer who must pay for it to be collected.

The biggest financial pain is felt by those unfortunate enough to buy in parts of the country where it costs more to put a roof over their head, as stamp duty disproportionately hits those areas where house prices are highest. (which, once again, must be reiterated is not a problem). good for a buyer).

It also discourages those higher up the real estate chain from selling and moving, reducing supply near the top, which then drives prices up all the way.

Also, stamp duty is regressive at the regional level, as it is much more difficult for someone from places where house prices are lower to raise the capital to move to another part of the country where they are higher, and then they must find a great opportunity. tax chunk on top of that.

Some of these things are illogical; it can easily be argued that those in more expensive areas are better able to pay, that a buyer has a fixed budget that includes deposits, taxes and other costs and works towards it, and that the economics of property don’t work.

However, I would argue that most people don’t want to hand over thousands or potentially tens of thousands of pounds to the government in taxes for moving house more times than absolutely necessary, so stamp duty is an issue. .

I know I would have moved house at least one more time if stamp duty wasn’t so high and I know many other people and families of my generation for whom that is true.

Band Own home stamp duty rates Buy to let and second homes
£0 – £125k 0% 3%
£125,001 – £250k two% 5%
£250,001 – £925k 5% 8%
£925,001 – £1.5 million 10% 13%
£1.5 million + 12% fifteen%
* No stamp duty is payable on property transactions costing less than £40,000 as they are considered low value and are not reported to HMRC.

Stamp duty need not be that high. We got by just fine on a simple 1 per cent stamp duty on property purchases until 1997, when Gordon Brown started meddling.

There is no reason why we cannot admit that the great stamp duty experiment was a mistake.

That 1 per cent applied to all houses costing more than £60,000 and stamp duty was not seen as a problem or major barrier to purchase.

But then, to cut a long and complicated story short, Chancellor Brown took advantage of his housing boom by adding extra thresholds, Chancellor Osborne did away with the weird flagstone system but couldn’t resist trying to drench the wealthy and middle-class families in the commuter belt, and Chancellor Sunak were embroiled in a temporary vacation that fueled the flames of the pandemic housing market

The problem with trying to turn the stamp tax from a bad tax to a not-so-bad tax is that we’re not starting from a good place.

The potential gain for any theoretical homebuyer from a tax cut is disproportionately skewed toward those who buy the most expensive homes, who obviously tend to be wealthier. First-time buyers have little to gain, as an exemption already takes out most of the tax. This has made making significant cuts a hard sell for years.

The home price to earnings ratio continues to rise, with prices now exceeding median earnings by 7 times, well above the long-term average of 4.5.

The home price to earnings ratio continues to rise, with prices now exceeding median earnings by 7 times, well above the long-term average of 4.5.

Meanwhile, house prices are at record levels compared to wages and there are fears that the stamp duty cut will push them higher.

However, it is important to note that many of the knee-jerk reactions to the idea of ​​a cut are based on stamp duty holidays and a permanent cut is potentially very different from a temporary one for a limited time in terms of distorting the market.

A stamp duty cut also risks a dose of push-me-pull-you economics. The Bank of England has been rapidly raising interest rates to combat inflation, raising the cost of borrowing to reduce demand and slow the economy. A stamp duty cut pushes fiscal policy in the opposite direction.

But there is an argument that lowering the lump sum hurdle to buying a home, in the form of a deposit and stamp, while limiting the amount people can borrow through higher mortgage rates, may not be a bad thing. .

Keep a cap on home prices through higher interest rates, while lowering the taxes paid to buy a home? I can see people going for it, whether it’s the plan or feasible is something else.

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