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.

 
 
 
 

Older people need better homes – but then, so does everybody else

Colne, Lancashire. Image: Getty.

Towards the end of last year, I started as an associate director at the Centre for Ageing Better, working particularly on our goal around safe and accessible homes. Before I arrived, Ageing Better had established some ambitious goals for this work: by 2030, we want the number of homes classed as decent to increase by a million, and by the same date to ensure that at least half of all new homes are built to be fully accessible.

We’ve all heard the statistics about the huge growth in the number of households headed by someone over 65, and the exponential growth in the number of households of people over 85. Frustratingly, this is often presented as a problem to be solved rather than a major success story of post war social and health policy. Older people, like everyone else, have ambitions for the future, opportunities to make a full contribution to their communities and to continue to work in fulfilling jobs.

It is also essential that older people, again like everyone else, should live in decent and accessible homes. In the last 50 years we have made real progress in improving the quality of our homes, but we still have a lot to do. Our new research shows that over 4 million homes across England fail to meet the government’s basic standards of decency. And a higher proportion of older people live in these homes than the population more generally, with over a million people over the age of 55 living in conditions that pose a risk to their health or safety.

It shouldn’t be too difficult to ensure all our homes meet a decent standard. A small number of homes require major and expensive remedial work, but the overwhelming majority need less than £3,000 to hit the mark. We know how to do it. We now need the political will to make it a priority. Apart from the benefits to the people living in the homes, investment of this kind is great for the economy, especially when so many of our skilled tradespeople are older. Imagine if they were part of training young people to learn these skills.


At a recent staff away day, we explored where we would ideally want to live in our later lives. This was not a stretch for me, although for some of our younger colleagues it is a long way into the future.

The point at which the conversation really took off for me was when we moved away from government definitions of decency and accessibility and began to explore the principles of what great homes for older people would be like. We agreed they needed light and space (by which we meant real space – our national obsession with number of bedrooms as opposed to space has led to us building the smallest new homes in Europe).

We agreed, too, that they needed to be as flexible as possible so that the space could be used differently as our needs change. We thought access to safe outdoor space was essential and that the homes should be digitally connected and in places that maximise the potential for social connection.

Of course, it took us just a few seconds to realise that this is true for virtually everyone. As a nation we have been dismal at moving away from three-bed boxes to thinking differently about what our homes should look like. In a world of technology and factory building, and as we build the new generation of homes we desperately need, we have a real chance to be bold.

Great, flexible homes with light and space, in the places where people want to live. Surely it’s not too much to ask?

David Orr is associate director – homes at the Centre for Ageing Better.