Thursday 22 August 2013 7:40 pm

Rising UK house prices intensify the need to cut illogical stamp duty

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STAMP duty has to be a good candidate for the most stupid, destructive and illogical of the UK’s many taxes. Residential stamp duty raised £4.2bn in 2011-12, just 0.8 per cent of the government’s total tax revenues. But its reform is long overdue.

It’s stupid because its “slab” rate structure means that, if someone buys a home just over a threshold (for example at £250,001 not £250,000), he or she has to pay the higher rate of tax (3 per cent) on the whole property price, not just the amount over the threshold.

It’s destructive because it has a huge impact on the property market, getting in the way of people who need to move and leading to less revenue from other taxes. And it’s illogical, as it means that people must contribute to the cost of government spending partly in proportion to how frequently they move home. Why should poorer people who move frequently have to pay more tax than richer people who move less frequently?

And thanks to forecasts of rising prices for homes over the next five years, home-buyers can expect to see their stamp duty bills rocket according to our new research. We have applied residential price forecasts by Savills Research to Land Registry data on individual transactions to unearth some worrying results.

Approximately 725,000 homes were sold in England and Wales last year. Of those, around 310,000 fell into the 1 per cent rate of stamp duty. But a nasty surprise awaits any future buyers of almost 100,000 of those homes, which will by 2017-18 have risen into the punitive 3 per cent band. The average stamp duty bill on those properties will rise from £2,319 to an alarming £8,445.

A fifth of those properties will be in London. And things will also get worse for those already in the higher bands. Almost 30 per cent of the London residential properties sold last year, where stamp duty of 3 per cent was paid, will be subject to the 4 per cent rate in five years’ time. Their average bill will soar from £13,485 to £22,501.

Increasingly, stamp duty at 4 per cent will become the norm across much of the capital, and over a third of London’s homes will be subject to that rate or higher by 2017-18. This includes over half of all homes in Camden, Hammersmith and Fulham, Islington, Kensington and Chelsea, Richmond, Wandsworth, Westminster and the City. And the 4 per cent band will also grow to capture over a quarter of homes in Barnet, Ealing, Hackney, Kingston, Lambeth and Southwark.

Stamp duty should be abolished. But with the government overspending and reluctant to cut its cloth more prudently, it’s understandable that it may be nervous about getting rid of a lucrative little source of revenue entirely. But recent research by Walbrook Economics demonstrated that rates could be halved at a net revenue cost of under £1bn, once the impact of greater activity in the market as a result of the lower taxes had been accounted for.

Given the concentrated pain it causes for people who need to move, the prospect of so many more falling into the trap, and the fact it raises less revenue than is often thought, it’s time for the chancellor to listen to our campaign and cut the hated moving tax.

Rory Meakin is head of tax policy at the TaxPayers’ Alliance.

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