Yahoo News The ridiculous tax that has doomed a generation to financial ruin
The Government is reported to be considering a tax break on stamp duty in the 2024 Autumn Statement.
According to reports, consideration is being given to raising the starting price at which stamp duty kicks in from £250,000 to £300,000.
This is thought to be part of a pre-election tax “giveaway” to encourage voters to stick with the Conservatives.
Stamp duty is a strange tax. It is voluntary (you are not compelled to buy a home – you could rent instead); it is generally levied at the very moment when the person who pays it has the least money in their entire lives; its taxpayers are much younger than average (the young move more than the elderly); and it has no offsets or allowances.
You pay it – it’s done – and you never get the money back, whatever you do in the future.
The largest three sources of tax revenue for the Government are (in order) income tax (£250bn), National Insurance contributions (£179bn) and VAT (£162bn). Taxpayers may not like these taxes, but they understand that the Government must supply itself with a core base of revenue that takes a slice out of the heart of the economy. These taxes do that.
But there are many more taxes, and many of these attempt to modify behaviour – taxing “bad” behaviour more heavily than “good” behaviour.
The reader will have his or her own idea of “good” and “bad”, but it is commonly agreed that duties on tobacco and alcohol (“sin” taxes) do align, at least in principle, with this idea.
Economist call taxes like this “Pigouvian”, after a British economist Arthur Pigou (1877-1959), who argued that where consumption or production has negative effects on people not involved (say like causing ill health which uses public health resources), an additional tax is justified to compensate society and discourage the behaviour.
The same argument is being applied at the moment to carbon and pollution. You may not agree with the calculus but at least the principle is logical.
But back to stamp duty, or residential SDLT, as it is officially called.
Stamp duty is levied on the purchase of a property to live in. Under no conceivable world could this behaviour be successfully claimed to be causing harm to the general population.
You could certainly argue that building houses on greenfield sites can have negative consequences to non-participants (like neighbours), but stamp duty applies to every home transaction, not just purchases of new homes.
We are also facing a house price crisis in the UK, driven by two factors – strict planning law which prevents large-scale new development – and a very strongly rising UK population.
Stamp duty (specifically SDLT) is not a new tax, but the rates are – they are much, much higher than in recent history.
Until 1997, the top marginal rate was 1pc (on properties over £60,000). As recently as 2011, the top rate was 4pc (on properties over £500,000). Today, the top rate is 12pc (on properties over £1.5m).
For an economically very important group – young professionals working in London and the Home Counties – these extraordinarily high rates will have changed an important perspective on life for them, and also changed their behaviour.
The perspective change is that I suspect they believe that the Government is not remotely interested in their financial wellbeing.
A couple (say late 20s/early 30s) buys a flat in London five years ago for £600,000. Let’s suppose today that they both earn really well – £100,000 p.a. (including bonuses, etc) each. They would have paid some £20,000 in stamp duty on their flat purchase (about 1/3rd of one of the couple’s annual after-tax income in the year they bought).
Then today they find a house that will accommodate their growing family, but in London this could easily be £1.5m. They are offered a mortgage large enough to make the jump, probably with the help of family as well, but the stamp duty bill will be £91,000, or about 18 months after-tax income for one of the couple.
No logic has been offered by Government for this extraordinarily harsh tax – there are no offsets (like an allowance for the £20,000 already paid), and to get this £1.5m house (by the way, not a mansion in London by any means) they will likely have sucked every savings account, supportive parent and mortgage-provider dry.
It will feel to them a ridiculous tax, targeted specifically at their desire to live and work in the best jobs in an expensive city. I suspect many will think about where else in the world they could get a better life.
But people are also adaptable, and the adaptation that this “ridiculous” tax engenders is to strongly discourage people climbing up the ladder from moving too often.
When I was moving up the ladder (in the 1970s-1990s), I moved four times in 10 years. Buy; do up; earn and save; move. This formula was brilliant for a generation now just retiring, but stamp duty has completely robbed the generation now moving up from doing this.
Moving now has to be in the largest leaps possible. This compromises the liquidity of the property market, and it runs the risk of forcing upwardly-mobile young people to take financial risks (like huge mortgages) that they may find come back to bite them. It exposes them to larger property market risk and larger interest rate risk than they would otherwise choose to take.
So far from being a “Pigouvian” tax, stamp duty encourages, rather than discourages, behaviour which is likely to have negative consequences for society. Society does not want a vulnerable, over-financed housing sector – the lessons of 2007-09 should have taught us that.
So why does this, or any Government, continue with this terrible tax? The answer, of course, is money. In 2022-23, residential SDLT in England raised £11.7bn, or just over 1pc of Government revenue.
This Government, desperate for cash, just cannot find within itself the will to abandon such a nice little earner – easy to administer with the money mainly coming from the apparently well-heeled.
A tax which impinges on young people trying to buy their first home – trying to better their living circumstances by moving from a flat to a house (perhaps to accommodate a growing family), and which has no basis in Pigouvian logic is a tax that should be abandoned, and indeed should never had been contemplated in the first place.
A small adjustment in the starting point for the tax is not going to change anything.
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