Why its time for stamp duty to be radically overhauled

July 13, 2012 - PRLog -- One of the headlines of George Osborne’s 2012 Budget was the introduction of higher Stamp Duty bands for properties worth over £1 million and the resultant impact on large mortgage clients. Now, though, an increasing number of experts are calling for a radical overhaul of Stamp Duty in order to boost the housing market.

And, an influential new review into Stamp Duty has found that the tax is ‘highly inefficient’ and ‘discourages mobility’. So, is it time for the Government to fundamentally change the way Stamp Duty works? We investigate.

Stamp Duty rules need major changes

At present, there are five Stamp Duty bands. Properties bought for over £125,000 incur a 1 per cent charge, while it’s 3 per cent on homes over £250,000 and 4 per cent on homes worth over £500,000.

Properties over £1 million face a 5 per cent bill while homes sold for over £2 million have a 7 per cent Stamp Duty liability. This adds a minimum £140,000 bill to high net worth finance clients buying a home worth over £2 million.

A five year review of Stamp Duty by the Institute of Fiscal Studies has found significant problems with the tax. The Mirrlees Review states: “Properties are not held by the people who value them most, and its slab structure – with big cliff-edges in tax payable at certain thresholds – creates particularly perverse incentives.”

Another problem with the tax is that the higher Stamp Duty thresholds have not risen since they were introduced in July 1997. Halifax research shows that if the thresholds had risen in line with house price inflation since 1997, the £250,000 threshold would now be £600,000 and the £500,000 threshold would stand at £1,200,000.

The main barrier to a review of Stamp Duty is that it generates a huge income for the Treasury. The tax raised £6.7 billion at its peak in 2007/8 and £3.3 billion in 2009/10. Halifax says the average stamp duty payment grew from £955 in 2000 to £1,793 in 2010.
Experts are now demanding a change in the Stamp Duty rules, as we see next.

Stamp Duty changes can have a positive effect

There has been recent proof that changes to Stamp Duty can have a positive effect on the housing market. The recent Stamp Duty holiday for first time buyers provided a timely fillip to the property market in early 2012, with RICS housing spokesman saying: “With first-time buyers no longer exempt from stamp duty as of the end of March, it seems that some are looking to purchase homes before the deadline. As a result, surveyors are relatively optimistic for the coming months.”

And, the Irish Government has responded to the property market downturn in the country by aggressively changing Stamp Duty rules. New-build homes up to 1,340 sq ft in size are now completely exempt from stamp duty so long as they are bought by an owner-occupier and are not for investment purposes.

In addition, Stamp Duty in Ireland has been cut from 9 per cent on properties above €1m first to 2 per cent. Below €1m it stands at just 1 per cent.
Irish mortgage expert Michael Dowling said: “It has helped and, while we are still in difficulty, those who were renting and looking at buying are more likely to do so as their transaction has been reduced.”

Hugh Wade-Jones, director of London mortgage broker Enness Private Clients has also called for changes to Stamp Duty. He said: “The Government should carefully monitor the changes being implemented in Scotland over the next couple of years.

“The Scottish Government is moving towards a system where the amount of tax paid is more closely related to the value of the property. This should avoid the ‘bunching’ around the tax thresholds and could help buyers at both ends of the market.”