Anthony Browne is MP for South Cambridgeshire, the Chair of the Conservative backbench Treasury Committee and a member of the Treasury Select Committee.
The drum beats for tax cuts are getting louder. It would be extraordinary if they weren’t: after the pandemic and the global energy crisis, the level of taxation in the UK is at a 70 year high. All Conservatives want to cut taxes – the political debate is about which ones and when.
There is one tax I would push to the front of death row: residential stamp duty, in particular on people buying homes to live in (as opposed to investment properties or second homes). Its formal name in England and Northern Ireland is Stamp Duty Land Tax (SDLT), with Scotland and Wales having different systems.
It would certainly be popular in Parliament. As chair of the 1922 Backbench Treasury Committee, I asked fellow Conservative MPs about taxes, and stamp duty and inheritance tax are clearly the two most unpopular taxes. Opinion polls suggest voters think likewise.
With the economy still struggling, any tax cuts should be focused at promoting economic growth; with the Government struggling with its budget deficit, cuts should minimise impact on revenues. Many countries, such as the US, Canada and Australia, have scrapped inheritance taxes but, however desirable, that is likely to have less impact on growth than cutting stamp duty.
All taxes reduce the activity they are imposed on, but stamp duty is widely seen as one of the most economically destructive of taxes. The Institute for Fiscal Studies – rarely seen as a hot-bed of tax-cutters – thinks stamp duty is so damaging that it repeatedly calls for it to be abolished outright. When Nick Mcpherson, the former permanent secretary of the Treasury and the antithesis of a right wing tax-cutter, gave evidence to us on the Treasury Select Committee about taxation, he gushed at length about what a bad tax stamp duty is.
The reasons why stamp duty is so damaging are well known: it quashes the housing market, and reduces labour mobility. Stamp duty is a transaction tax – a tax paid when you buy or sell – and it inescapably reduces the number of transactions.
This is not contested: the Treasury accepts the point in its modelling. Stamp duty has such a strong impact on housing transactions that the Treasury has to impose cuts or rises immediately rather than forward announcing them, which would cause market chaos. It is easy to avoid by simply not moving, or building an extension. Making moving house expensive means that millions of people live in inappropriate housing – either too big or small, or in the wrong place – not least the empty-nesters, who don’t want to pay thousands in tax in order to downsize. People don’t take jobs in other parts of the country because they can’t afford to move, so making the labour market less efficient.
Stamp duty is particularly painful for homebuyers because you cannot take out a mortgage to pay it, and so it is deducted from the hard-earned deposit. It is paid out of post-tax income: higher rate tax payers would need to earn nearly £17,000 extra to fund £10,000 stamp duty. Unlike paying for an extension, it doesn’t increase the value of your house, and you won’t get it back when you sell.
For most of its life, stamp duty – which was introduced in 1694 to pay for war with France – was at a low rate with limited impact. It was just one per cent until Labour came to power in 1997 and immediately started ramping it up on an almost annual basis. The coalition Government of 2010 continued this course, and the tax has ended up at 12 per cent for the most expensive properties (or 17 per cent if it is a second home bought by an overseas buyer).
In 2013, I wrote a report, Stamping on Aspiration, for the HomeOwners Alliance (which I co-founded), highlighting the damaging impact of higher rates of stamp duty on the dream of homeownership. The Centre for Policy Studies and Onward have both recently published reports calling for a scaling back of stamp duty.
The Government, seeking to limit the impact on homeownership, has introduced an exemption for first-time buyers, and has also raised the threshold so most house purchases don’t incur the tax. Both moves are welcome. But housing is a single market, and gumming up the sales of more expensive houses stops people moving up and down.
All this is well known, but the Government stares at the revenues (£10 billion last year) – and freezes. But it is time for a more nuanced understanding of stamp duty and how it operates. In short, people buying homes to live in are over-taxed, and those buying properties for other purposes are comparatively undertaxed.
Although housing is a single market, the impact of stamp duty is very different if someone is buying a home to live in or buying it for another purpose such as investment or a second home. Most of the pernicious effects of stamp duty apply to people buying homes to live in – the arguments about labour mobility or downsizing or dreams of homeownership don’t apply if it is an investment property.
All other transaction taxes are flat rate: you pay the same percentage whatever the value of the transaction. The only reason that stamp duty is stepped up in a progressive way (with lower rates for less expensive properties) is to help householders get onto the housing ladder, and then move up it.
There are very good social and economic arguments for this approach, but they simply doesn’t apply when someone is buying an investment property or second home. In some parts of the country, second homeownership is so rampant that it causes massive damage to local economies and communities. Stamp duty should be a flat rate whatever the value of the property if people are buying it for any reason other than to live in.
In 2013, I wrote another policy paper, A New Rate For Property Investors, calling for a higher rate of stamp duty for property investors, which after a lot of engagement with Treasury got rather mangled and became the three per cent additional property premium. We have a shortage of housing in the UK, and the primary function of housing should be to provide a home to live in.
This already raises a lot of money – last year, of the £10 billion residential raised by residential stamp duty, nearly half (£4.6bn) came from property transactions incurring the higher rate. This rate could be increased further, and flat rated, with the revenues being used to cut stamp duty for people buying homes to live in.
It is also clear that residential stamp duty does not in fact raise the £10 billion that that HMRC tables suggest. The Treasury accepts that stamp duty reduces the number of house sales, but does not take into account the loss of other taxes – primarily VAT on all the other things homebuyer spend money on, such as building work and furniture, which can be easily calculated. Take that into account, and stamp duty raises far less than the headlines suggest. The Onward and CPS reports propose other changes to enable stamp duty to be cut without the government losing revenue.
With the debate on tax cuts set to grow in volume, we should prioritise scrapping this tax on homeownership. We should stamp out stamp duty.