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  4. Stamp duty now 'just a bad tax,' says IFS

Stamp duty now 'just a bad tax,' says IFS

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Published: 16 December 2014 | Author: Bernard Clarke

We welcomed the unexpected announcement by the chancellor that he was reforming stamp duty so that home-buyers are no longer forced to pay the highest applicable rate on the whole of the price paid for a property. 

The chancellor’s reform, announced in his autumn statement, means that buyers now pay duty at higher rates only on the amount above each threshold, in the same way they pay income tax. We are disappointed that this reform has been so long in coming, having campaigned for a comprehensive re-think of stamp duty for many years. But the chancellor’s announcement is better late than never. 

In order to produce a broadly similar amount of revenue from stamp duty on residential property purchases, the chancellor has also introduced a new set of rates and thresholds. The table below shows the new rates and the thresholds at which each begins to apply. The table also shows the proportion of mortgage-funded transactions in the last year in each of the new tax bands.

Table One: New stamp duty bands and rates

Price band Stamp duty rate Proportion of
mortgage-funded
transactions in price band

£0 – £125,000 0% 21.6%
£125,001 – £250,000 2% 47.9%
£250,001 – £925,000 5% 29%
£925,001 – £1.5 million  10% 1.1%
Over £1.5 million 12% 0.4%

 

Source: HM Treasury, CML

There will be losers as well as winners as a result of these changes, although the chancellor said that 98% of buyers would pay less tax than would have been the case before his reforms were implemented. As a result, the Treasury would forego £800 million in revenue, he said.

This loss of revenue will, however, soon be recovered. The chancellor has made no commitment to index the new stamp duty thresholds in line with house price inflation so, as a result of fiscal drag, the amount of revenue from stamp duty will rise again as house prices increase.

However, even if revenue from stamp duty does increase again over time, the removal of the slab structure is a one-off modest improvement in the way the tax operates. Stamp duty was described in the Mirrlees Review, published by the Institute for Fiscal Studies (IFS) in 2010, as "highly inefficient" – a tax that, the review said, discouraged mobility and created perverse incentives.

However, the IFS has now said that, despite the chancellor’s reform, stamp duty revenue could more than double by 2020. It described the chancellor’s announcement as a modest measure that turned a "very bad tax" into just a "bad tax."

The slab structure of stamp duty clearly distorted property prices around each new threshold, as sellers came under pressure to agree to prices at which a lower rate of tax would apply. The introduction of higher rates and additional bands of stamp duty from 1997 onwards created further market distortion.

Chart One: Mortgage-funded property transactions in price bands, 2013-14

 16.12.2014 chart 1 stamp duty

 

Source: CML

Revenue from stamp duty on residential property purchases is currently near its all-time high point, at almost £6.5 billion a year. That revenue is based on transactions likely to total around 1.2 million this year. Annual revenue from stamp duty peaked at almost £.6.7 billion in 2007-08, when the number of transactions totalled 1.6 million. Those figures show how higher property prices increase stamp duty revenue – a process known as fiscal drag.

After reaching a high point in 2007-08, revenue from stamp duty on residential property purchases more than halved to less than £3 billion in 2008-09, as the number of transactions declined to around 900,000 and house prices also fell.