Stamp duty

Brief overview

Stamp duty has a long history. As a tax it has existed for over 300 years. As this might suggest, it has been an easy and profitable tax to collect. The "take" on residential stamp duty in 2003/04 was £3.8 billion. This figure constitutes an increase of over 900% since 1985/86 and an increase of 360% on the revenue raised from residential stamp duty at the peak of the late 1980s' housing boom.

Following a concerted effort by the residential property industry, the Chancellor announced an increase in the zero rate threshold, from £60,000 to £120,000 in the 2005 Budget. The 2006 Budget increased this upper limit again slightly to £125,000. 

This, along with reduced house price inflation, may reduce the rate of increase in the "take" from residential stamp duty. It is, however, unlikely to stop the year on year increase in revenue the Chancellor enjoys from the payment of stamp duty by home buyers. 

Stamp duty is currently based on a "slab" structure as follows.

Less than £125,000                            Zero

£125,000 <£250,000                           one per cent on entire house price

£250,000 <£500,000                           three per cent on entire house price

£500,000+                                         four per cent on entire house price

The CML has long argued that the "slab" structure creates inefficiencies in the housing market. These were highlighted in a report that we commissioned from the University of Reading to identify how the current system distorts the housing market and to suggest alternatives to counter these problems. The report, entitled Residential Stamp Duty: Time for a change, is attached. 

The research concluded that the current system:

• Affects first-time buyers much more heavily than existing home-owners. This is particularly true in a booming market where first-time buyers are already constrained;
  
• Places a greater burden on the south of the country, which accounts for some 75% of residential stamp duty revenue but less than 50% of transactions; 
  
• Encourages price bunching just below the thresholds where a new and higher rate applies; and
  
• Encourages the development of avoidance strategies such as sellers artificially boosting the value of fixtures and fittings in their properties.

Because of the shortcomings in the current "slab" stamp duty regime, the CML has been pressing the Government to reform the tax. We favour a graduated structure that only charges higher rates of duty on the proportion of the property value above the threshold(s).

We also believe that the revenue generated by residential stamp duty has risen far enough. But it would be difficult to persuade the Chancellor to accept a reduction in the tax revenue generated by stamp duty (indeed, the revenue lost by the recent increase in the zero rate threshold was more than made up for by the removal of more beneficial rates for commercial transactions in disadvantaged areas). We, therefore, suggest that a new graduated structure is designed in such a way that maintains revenue to the Exchequer. However, the new thresholds should be indexed to house price inflation to avoid "fiscal drag" (where households are pulled into higher tax bands through house price inflation alone). 

If our proposals were accepted it would mean that the zero rate threshold would increase significantly. As a result, many properties that currently attract stamp duty of one per cent would not be liable at all. This would be of great benefit to first time buyers.