Stamp duty is a bad tax – but scrapping it will do nothing for first-time buyers

This was a better plan. Image: Getty.

Not a day seems to pass in this Conservative leadership contest without promises of tax cuts. Today the Times brings news that Boris Johnson is contingency planning an emergency No Deal budget to ensure the economy is “going gangbusters” by 31 October.

Central to that is said to be an idea to abolish stamp duty on homes worth less than £500,000 and reverse George Osborne’s increase in the levy, from 7 per cent to 12 per cent, on those worth more than £1.5m.

Stamp duty has few fans, and rightly so. It is a tax on transactions and so results in fewer of them, reducing housing market activity and disincentivising owner-occupiers from moving for work. It is inefficient and deserves to go.

However, on top of this is frequently added the complaint that it makes buying a house more expensive by adding an extra few per cent onto the purchase price. Indeed, this is how the idea is usually sold. Dominic Raab, who has been promoting the stamp duty reform Johnson is now considering, suggested earlier this year that it would “[save] first-time buyers up to £10,000 and [encourage] people to buy”.

But this is a misconception. That’s because, while stamp duty is levied on the buyer, the incidence – who actually shoulders the cost – is on the seller.

Consider a first-time buyer with an upper limit on their housebuying budget – after lawyers’ fees, moving costs and so on – of £510,000. They cannot afford to pay £510,000 for a property because the stamp duty liability – £15,500 – would take them over their budget.

Instead the most they can afford on the purchase price is £500,000, which would attract a stamp duty bill of £10,000. So the stamp duty has been capitalised into the price, reducing the value that can be recouped by the seller but leaving the buyer no better or worse off (except when they come to sell later).


If Johnson now abolishes stamp duty on homes up to £500,000 in value, the same buyer now has more of their £510,000 to put towards the purchase price. Assuming values above £500,000 will still be taxed at five per cent, this first-time buyer will now be able to spend a touch above £509,500 for the same property.

Who is the winner here? It’s not the first-time buyer – it’s the seller, who is £9,500 better off. The loser, to the tune of that £9,500, is the exchequer.

The effect on the first-time buyer is at best neutral but, in fact, if the plan is to abolish stamp duty on all acquisitions below £500,000 – including those by landlords and existing homeowners – then life is about to get harder for those trying to get their foot on the ladder.

Why? Because currently stamp duty is levied at higher rates on existing homeowners, and even higher rates still on landlords. This has depressed the price at which a landlord is willing to buy a property of a certain rental value below what the first-time buyer is willing to pay, giving the latter a distinct advantage.

Take a landlord who has £520,000 to spend on the same property as in our example above – plenty enough to outbid the first-time buyer whose maximum budget is £510,000. At current rates of stamp duty, while the first-time buyer can afford to bid £500,000 (with a tax bill of £10,000), the landlord can only afford to bid a touch above £490,000, on which the tax bill for them would be some £29,200. The first-time buyer gets the property.

If stamp duty were to be abolished altogether on property acquisitions up to £500,000, that would no longer be the case. The landlord would pay the same rate of stamp duty as the first-time buyer, and the winning bidder is the one with the bigger budget. Now, while the first-time buyer can afford to pay £509,500, the landlord can afford to pay £519,000 (but they probably don’t – they pay £1,000 or so more than the first-time buyer). The landlord gets the property.

This is the effect of the stamp duty reforms that are being mooted. Tax revenues will fall, house prices will rise, and first-time buyers will lose their advantage in the market against landlords. On efficiency grounds, this might all be a very good idea, and many will support it. But let’s be under no illusions about who will be the winners (existing homeowners) and who will be the losers (first-time buyers and the public purse).

If the aim is to help first-time buyers, retaining a higher rate of stamp duty on landlords makes sense. Even if that isn't the aim, the sensible way to abolish stamp duty would be to replace the lost revenues with a corresponding increase in other property taxes that are more efficient. The reconfiguration of council tax into a more equitable levy, calculated as a straightforward percentage of the value of the property (or even the land), would be a good place to start.

Daniel Bentley is editorial director at the think tank Civitas.

 
 
 
 

17 things the proposed “Tulip” skyscraper that London mayor Sadiq Khan just scrapped definitely resembled

Artist's impression. See if you can guess which one The Tulip is. Image: Foster + Partners.

Sadiq Khan has scrapped plans to build a massive glass thing in the City of London, on the grounds it would knacker London’s skyline. The “Tulip” would have been a narrow, 300m skyscraper, designed by Norman Foster’s Foster & Partners, with a viewing platform at the top. Following the mayor’s intervention, it now won’t be anything of the sort.

This may be no bad thing. For one thing, a lot of very important and clever people have been noisily unconvinced by the design. Take this statement from Duncan Wilson, the chief executive of Historic England, from earlier this year: “This building, a lift shaft with a bulge on top, would damage the very thing its developers claim they will deliver – tourism and views of London’s extraordinary heritage.”

More to the point, the design was just bloody silly. Here are some other things that, if it had been built, the Tulip would definitely have looked like.

1. A matchstick.

2. A drumstick.

3. A cotton ear bud.

4. A mystical staff, of the sort that might be wielded by Gandalf the Grey.

5. A giant spring onion.

6. A can of deodorant, from one of the brands whose cans are seemingly deliberately designed in such a way so as to remind male shoppers of the fact that they have a penis.

7. A device for unblocking a drain.

8. One of those lights that’s meant to resemble a candle.

9. A swab stick, of the sort sometimes used at sexual health clinics, in close proximity to somebody’s penis.

10.  A nearly finished lollipop.

11. Something a child would make from a pipe cleaner in art class, which you then have to pretend to be impressed by and keep on show for the next six months.

12. An arcology, of the sort seen in classic video game SimCity 2000.

13. Something you would order online and then pray will arrive in unmarked packaging.

14. The part of the male anatomy that the thing you are ordering online is meant to be a more impressive replica of.

15. A building that appears on the London skyline in the Star Trek franchise, in an attempt to communicate that we are looking at the FUTURE.


14a. Sorry, the one before last was a bit vague. What I actually meant was: a penis.

16. A long thin tube with a confusing bulbous bit on the end.

17. A stamen. Which, for avoidance of doubt, is a plant’s penis.

One thing it definitely does not resemble:

A sodding tulip.

Anyway, it’s bad, and it’s good the mayor has blocked it.

That’s it, that’s the take.

(Thanks to Anoosh Chakelian, Jasper Jackson, Patrick Maguire for helping me get to 17.)

Jonn Elledge is editor of CityMetric and the assistant editor of the New Statesman. He is on Twitter as @jonnelledge and on Facebook as JonnElledgeWrites.

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