In one form or another Stamp Duty Land Tax has been a feature of the English taxation system for hundreds of years. It raises significant revenue for the Exchequer, is easy and cheap to administer, and does not affect most taxpayers.
However there is increasing concern within policy circles that Stamp Duty Land Tax as currently configured is a major deterrent to housing transactions.
In this first blog of two, we outline some key facts about Stamp Duty Land Tax and how it affects the UK housing market as a whole.
Stamp Duty revenue
Stamp Duty Land Tax raises more than £8 billion per annum for the Treasury, but is a heavy, immediate tax on transactions that contributes to England’s dysfunctional housing market.
Revenues from SDLT have been rising steadily since 2008/09 as a result of increasing house prices, higher tax rates on more expensive properties, and the 3% surcharge imposed in 2016 on investors and second-home buyers. Housing-market transactions on the other hand remain weak: the annual number of transactions fell by more than half after the 2008 crash and in 2016 were still 38% below levels seen in the early 2000s.
The majority of revenue comes from sales of much more typical homes, particularly in the South East: 58% of revenues were from properties worth between £250,000 and £1 million. Importantly, people paying average house prices in all four southern regions must now pay SDLT, while in London a purchaser must buy a home worth less than ¼ the price of an average flat (and an even smaller fraction for a house) to avoid stamp duty.
Twenty years ago, buyers of median-priced homes paid less than £1000 in stamp duty and that was true in London, as well as in England overall. Since then SDLT on a median-priced home in England has more than quadrupled, and in London it has gone up by a factor of more than 12. The gap between London and the rest of the country continues to grow.
Because of higher property values in London and the South East, these regions account for more than ½ of SDLT revenues, whereas in total they account for only around 30% of dwellings.
The tax is highly progressive at least in terms of dwelling values: in 2016/17, a fifth of receipts came from the purchases of properties in the highest tax band, although these properties accounted for well under 1% of transactions.
Effect on Downsizing
SDLT is one of the most important influence on downsizing decisions.
Downsizers can’t buy something that costs the same as their original house without spending money on the tax but they can stay where they are for nothing. Many therefore do stay, continuing to live in homes that may be highly unsuitable for their needs and imposing additional costs on health and social services.
This lack of activity in turn reduces the demand for new housing that suits older households and means there is less choice for those who do want to move. The UK is almost alone in the developed world in having so few retirement communities which can help keep people healthier and connected.
SDLT increases the already difficult deposit requirement; in addition, because it makes older households less likely to sell, there are fewer suitable homes on the market. This makes it difficult not only for first-time buyers but also for families and second steppers to get the housing that is best for them.
SDLT contributes to reduced household mobility. Having bought a home, people are unwilling to move again soon and ‘waste money’ by paying SDLT twice over. This is costly for individual households as they are less likely to take up new job opportunities (or, if they do, may need to commute long distances); it is costly for the economy because it inhibits the efficient allocation of labour, and consumer expenditure and housing investment are lower than they otherwise would be.