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.

 
 
 
 

Green roofs improve cities – so why don’t all buildings have them?

The green roof at the Kennedy Centre, Washington DC. Image: Getty.

Rooftops covered with grass, vegetable gardens and lush foliage are now a common sight in many cities around the world. More and more private companies and city authorities are investing in green roofs, drawn to their wide-ranging benefits which include savings on energy costs, mitigating the risk from floods, creating habitats for urban wildlife, tackling air pollution and urban heat and even producing food.

A recent report in the UK suggested that the green roof market there is expanding at a rate of 17 per cent each year. The world’s largest rooftop farm will open in Paris in 2020, superseding similar schemes in New York City and Chicago. Stuttgart, in Germany, is thought of as “the green roof capital of Europe”, while Singapore is even installing green roofs on buses.

These increasingly radical urban designs can help cities adapt to the monumental challenges they face, such as access to resources and a lack of green space due to development. But buy-in from city authorities, businesses and other institutions is crucial to ensuring their success – as is research investigating different options to suit the variety of rooftop spaces found in cities.

A growing trend

The UK is relatively new to developing green roofs, and governments and institutions are playing a major role in spreading the practice. London is home to much of the UK’s green roof market, mainly due to forward-thinking policies such as the 2008 London Plan, which paved the way to more than double the area of green roofs in the capital.

Although London has led the way, there are now “living labs” at the Universities of Sheffield and Salford which are helping to establish the precedent elsewhere. The IGNITION project – led by the Greater Manchester Combined Authority – involves the development of a living lab at the University of Salford, with the aim of uncovering ways to convince developers and investors to adopt green roofs.

Ongoing research is showcasing how green roofs can integrate with living walls and sustainable drainage systems on the ground, such as street trees, to better manage water and make the built environment more sustainable.

Research is also demonstrating the social value of green roofs. Doctors are increasingly prescribing time spent gardening outdoors for patients dealiong with anxiety and depression. And research has found that access to even the most basic green spaces can provide a better quality of life for dementia sufferers and help prevent obesity.

An edible roof at Fenway Park, stadium of the Boston Red Sox. Image: Michael Hardman/author provided.

In North America, green roofs have become mainstream, with a wide array of expansive, accessible and food-producing roofs installed in buildings. Again, city leaders and authorities have helped push the movement forward – only recently, San Francisco created a policy requiring new buildings to have green roofs. Toronto has policies dating from the 1990s, encouraging the development of urban farms on rooftops.

These countries also benefit from having newer buildings, which make it easier to install green roofs. Being able to store and distribute water right across the rooftop is crucial to maintaining the plants on any green roof – especially on “edible roofs” which farm fruit and vegetables. And it’s much easier to create this capacity in newer buildings, which can typically hold greater weight, than retro-fit old ones. Having a stronger roof also makes it easier to grow a greater variety of plants, since the soil can be deeper.


The new normal?

For green roofs to become the norm for new developments, there needs to be buy-in from public authorities and private actors. Those responsible for maintaining buildings may have to acquire new skills, such as landscaping, and in some cases volunteers may be needed to help out. Other considerations include installing drainage paths, meeting health and safety requirements and perhaps allowing access for the public, as well as planning restrictions and disruption from regular ativities in and around the buildings during installation.

To convince investors and developers that installing green roofs is worthwhile, economic arguments are still the most important. The term “natural capital” has been developed to explain the economic value of nature; for example, measuring the money saved by installing natural solutions to protect against flood damage, adapt to climate change or help people lead healthier and happier lives.

As the expertise about green roofs grows, official standards have been developed to ensure that they are designed, built and maintained properly, and function well. Improvements in the science and technology underpinning green roof development have also led to new variations on the concept.

For example, “blue roofs” increase the capacity of buildings to hold water over longer periods of time, rather than drain away quickly – crucial in times of heavier rainfall. There are also combinations of green roofs with solar panels, and “brown roofs” which are wilder in nature and maximise biodiversity.

If the trend continues, it could create new jobs and a more vibrant and sustainable local food economy – alongside many other benefits. There are still barriers to overcome, but the evidence so far indicates that green roofs have the potential to transform cities and help them function sustainably long into the future. The success stories need to be studied and replicated elsewhere, to make green, blue, brown and food-producing roofs the norm in cities around the world.

Michael Hardman, Senior Lecturer in Urban Geography, University of Salford and Nick Davies, Research Fellow, University of Salford.

This article is republished from The Conversation under a Creative Commons license. Read the original article.