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.

 
 
 
 

The mountain in North Wales that tried to stop the UK’s blackout

Elidir Fawr, the mountain in question. Image: Jem Collins.

Last Friday, the UK’s National Grid turned to mush. Not the official term perhaps, but an accurate one after nearly one million people were left without power across the country, with hundreds more stranded at train stations – or even on trains (which isn’t nearly as fun as it might immediately sound). 

Traffic lights stopped working, back-up power failed in hospitals, and business secretary Andrea Leadsom launched an investigation into exactly what happened. So far though, the long and short of it is that a gas-fired power station in Bedfordshire failed just before 5 o’clock, followed just two minutes later by Hornsea offshore wind farm. 

However, amid the resulting chaos and inevitable search to find someone to blame for the outage, a set of mountains (yes, mountains) in North Wales were working extremely hard to keep the lights on.

From the outside, Elidir Fawr, doesn’t scream power generation. Sitting across from the slightly better known Mount Snowdon, it actually seems quite passive. After all, it is a mountain, and the last slate quarry in the area closed in 1969.

At a push, you’d probably guess the buildings at the base of the mountain were something to do with the area’s industrial past, mostly thanks to the blasting scars on its side, as I did when I first walked past last Saturday. 

But, buried deep into Elidir Fawr is the ability to generate an astounding 1,728 megawatts of electricity – enough to power 2.5 million homes, more than the entire population of the Liverpool region. And the plant is capable of running for five hours.

Dubbed by locals at the ‘Electric Mountain’, Dinorwig Power Station, is made up of 16km of underground tunnels (complete with their own traffic light system), in an excavation which could easily house St Paul’s Cathedral.

Instead, it’s home to six reversible pumps/turbines which are capable of reaching full capacity in just 16 seconds. Which is probably best, as Londoners would miss the view.

‘A Back-Up Facility for The National Grid’

And, just as it often is, the Electric Mountain was called into action on Friday. A spokesperson for First Hydro Company, which owns the generators at Dinorwig, and the slightly smaller Ffestiniog, both in Snowdonia, confirmed that last Friday they’d been asked to start generating by the National Grid.

But just how does a mountain help to ease the effects of a blackout? Or as it’s more regularly used, when there’s a surge in demand for electricity – most commonly when we all pop the kettle on at half-time during the World Cup, scientifically known as TV pick-up.

The answer lies in the lakes at both the top and bottom of Elidir Fawr. Marchlyn Mawr, at the top of the mountain, houses an incredible 7 million tonnes of water, which can be fed down through the mountain to the lake at the bottom, Llyn Peris, generating electricity as it goes.


“Pumped storage technology enables dynamic response electricity production – ofering a critical back-up facility during periods of mismatched supply and demand on the national grid system,” First Hydro Company explains.

The tech works essentially the same way as conventional hydro power – or if you want to be retro, a spruced up waterwheel. When the plant releases water from the upper reservoir, as well as having gravity on their side (the lakes are half a kilometre apart vertically) the water shafts become smaller and smaller, further ramping up the pressure. 

This, in turn, spins the turbines which are linked to the generators, with valves regulating the water flow. Unlike traditional UK power stations, which can take hours to get to full capacity, at Dinorwig it’s a matter of 16 seconds from a cold start, or as little as five if the plant is on standby.

And, designed with the UK’s 50hz frequency in mind, the generator is also built to shut off quickly and avoid overloading the network. Despite the immense water pressure, the valves are able to close off the supply within just 20 seconds. 

At night, the same thing simply happens in reverse, as low-cost, surplus energy from the grid is used to pump the water back up to where it came from, ready for another day of hectic TV scheduling. Or blackouts, take your pick.

Completed in 1984, the power station was the product of a decade of work, and the largest civil engineering project commissioned at the time – and it remains one of Europe’s largest manmade caverns. Not that you’d know it from the outside. And really, if we’ve learned anything from this, it’s that looks can be deceiving, and that mountains can actually be really damn good at making electricity. 

Jem Collins is a digital journalist and editor whose work focuses on human rights, rural stories and careers. She’s the founder and editor of Journo Resources, and you can also find her tweeting @Jem_Collins.