Are Stamp Duty’s days numbered?

The government is considering a total overhaul of property taxation to shift the tax burden from homebuyers to home sellers, including scrapping Stamp Duty.

Under the plans being looked at by the Treasury, owner-occupiers would no longer have to pay Stamp Duty Land Tax (SDLT) when buying a property. SDLT is paid on around 60% of home purchases, and has been criticised by economists and property industry professionals for making it more difficult to move house. First-time buyers start paying SDLT on purchases over £300,000, while for all other buyers it kicks in at £125,000.

The mooted replacement is a tax on home sales over £500,000, paid by the seller and based on the value of the property. At current house prices, this would affect around 20% of sales.

In the longer term (not during this Parliament), the government is also looking at replacing council tax with a local property tax.

What would the new tax mean for the housing market?

A lot will depend on how high the government sets the new tax.  

In a paper for the think tank Onward that reportedly inspired the government, adviser to the former Conservative government Tim Leunig said that a rate of 0.54% applied to the share of sale price over £500,000, plus a 0.278% surcharge on values over £1 million, would be enough to replace SDLT.  

Under this system, someone who sells a home for £600,000 would pay £540 in tax, while selling for £1.1 million would attract tax of £3,518. Even if the tax applies to the full purchase price, the tax bill would be £3,240 and £6,218 respectively. By comparison, the SDLT payable on those two properties would be £20,000 and £53,750. Either way, that would replace a hefty burden for buyers with a much lighter one for sellers, making housing transactions cheaper overall.  

The new tax could disincentivise downsizing, as downsizers will now face an extra tax that they didn’t previously. However, agents can help downsizers weigh up the cost of the sales tax versus the SDLT that they will no longer have to pay.

The £500,000 threshold could also be moved, and it has already drawn criticism from people in more expensive areas. In London, where the average house price is £673,040 according to Rightmove, most sellers would pay the tax.

But with an estimated £50bn fiscal ‘black hole’ to fill, the new tax may have to raise more revenue than the one it is replacing. SDLT raised £11.6bn in the last financial year. Separately, the government is also rumoured to be planning to apply capital gains tax to primary residences over £1.5 million.

Another big question is how it will apply to landlords. The government’s current proposal is that the new tax would only apply to owner-occupied homes, while buyers of second homes (including buy-to-lets) would still pay SDLT, including the current 5% second home surcharge.

This would make it tougher for landlords to compete against owner-occupiers when buying properties. However, if they don’t pay the new tax on housing sales, they could find it easier to sell to owner-occupiers at a lower price. This could accelerate the shrinking of the private rented sector, making it harder for those priced out of buying to find anywhere to live.