The Budget: it's what the chancellor didn't say that's important
Published: 28 March 2012 | Author: Bernard Clarke
Last month’s Budget introduced a new 7% stamp duty band on homes costing more than £2 million – but not many will notice its effects. At current prices, fewer than 2,000 transactions a year will be affected, almost all of them in London. Only around 850 of these purchases are partially funded by a mortgage. The rest are cash deals. So, the Budget did little to change the housing scene.
Of much greater significance for lenders and borrowers is what the chancellor chose not to say in his Budget speech. Despite calls from us and from many others for an extension of the stamp duty exemption for first-time buyers, the chancellor allowed it to lapse, as expected. People are affected by this on a much larger scale, with around 96,000 first-time buyers taking out mortgages for properties in the £125,000 to £250,000 price range in 2011.
While the 7% stamp duty band has little direct impact on the majority, the wider significance for home-buyers is that it cements even more firmly in place what the Institute for Fiscal Studies has described as "a poorly designed and distorting tax." Stamp duty, as currently constituted, distorts the housing market, and its reform is long overdue. However, the introduction of additional higher bands simply reinforces the current structure of this tax and makes radical reform even less likely.
The most obvious iniquity of stamp duty is that everyone pays it at the highest marginal rate on the whole of the purchase price of their home. A fairer approach would be to adopt a system like income tax, with buyers only paying higher marginal rates on the amount above each new threshold. That would end the current market distortion created by the "bunching" of transactions at prices just below the level at which new rates of tax come into effect. As we have shown in the past, it is possible to do this without any loss of revenue to the Treasury.
Another problem with stamp duty is that there is no established practice of indexing thresholds in line with inflation, as with other transaction taxes. The bulk of stamp duty – 87% of total revenue in 2010/11 – now comes from property sales of more than £250,000, where higher rates of duty begin to apply. A decade ago, however, the proportion of stamp duty paid at higher rates was a little over 60%.
The Budget was also silent on another looming deadline for lenders and borrowers. Borrowers currently have to wait 13 weeks to qualify for support for mortgage interest (SMI), which covers loans of up to £200,000. But the 13-week qualifying period and £200,000 limit are currently only temporary measures, introduced in 2009 and due to end from the beginning of next year. Unless there is an announcement from the government, the qualifying period and upper limit are likely to revert to 39 weeks and £100,000 in 2013.
In March, we wrote to the Treasury, jointly with Citizens Advice and Shelter, calling for the existing 13-week qualifying period and £200,000 limit to be retained. Earlier this year, the government made an informal "call for evidence" on SMI, to which we submitted a response. The government is expected to set out its views in the coming weeks, so it was no surprise that the chancellor made no announcement on this subject in his Budget.
We strongly believe that the end of this year is not the right time to curtail the support provided by SMI. This benefit has already helped nearly a quarter of a million people to stay in their homes. It has been crucial in helping keep mortgage possessions below forecast, particularly since 2009.
Nine months is an unreasonably long time for borrowers to manage their mortgage payments without state support. The ability of lenders to extend forbearance has also been crucial in helping keep mortgage possessions in check. But that would be severely curtailed if borrowers had to wait nine months, rather than 13 weeks, for help.
Unlike stamp duty reform, state support for borrowers in difficulty is still very much a "live" issue. The Department for Communities and Local Government accepts that more generous availability of SMI has had a "notable effect" in lowering the number of cases of possession. And the government achieves considerable savings in the cost of re-housing families, and gains from reduced pressure on scarce social housing resources.
The government is right to look at how SMI might be improved, so that it works better for everyone. But keeping people in their homes, where we can, delivers widespread benefits – so there is much to play for in the coming weeks.