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Britain's housing market, distorted

From prime property feeding frenzy to potential first time buyer death blow, the ill effects of stamp duty mean it must be reformed, writes Linton Chiswick.

 
Britain's housing market, distorted

If you’ve been wondering why that conveyancing solicitor or high-end London estate agent hasn’t been returning your calls this last couple of weeks, it might have had something to do with Stamp Duty.

Anecdotal evidence of wealthy property buyers pushing major purchases through before this week’s hike in Stamp Duty for £1 million+ properties suggests a minor prime property feeding frenzy. They’ve been creative, too. Sale-and-lease-back deals – in which contracts are exchanged and completed but the vendor stays in situ – have enabled families to remain in their homes at least until the end of the school year, and saved buyers 1% of tax payable. Contracts have been drawn up with penalty clauses should the vendors fail to get their acts together in time to beat the deadline. One Hampstead specialist claims to have sold £50m worth of houses in a fortnight.

It’s perhaps surprising that a buyer with the means to complete on a property worth millions of pounds would get so lathered up about a single percentage point, particularly in a market in which each house is so individual and property’s such a heart, rather than head, purchase. But Stamp Duty’s charged by a slab structure and 1% of £50m is £500,000 whichever way you look at it.

Just in case, during the last couple of weeks, the property well-endowed needed reminding that things could be worse on the tax front, the permanently off-message Vince Cable managed to drag the subject of a “mansion tax” back into the headlines before the budget had even been digested.

Surely he couldn’t be serious. Anyone with even a casual experience of the property market knows that – particularly when volume’s so low, and especially at the posh end of the market where property prices depend on the right tycoon walking through the door on the right day – the valuation process contains too much hocus pocus to make it a fair basis for annual taxation. The very idea of a threshold is ridiculous and would distort markets.

But when Nick Clegg went in front of the media to keep his colleague in check, he achieved precisely the opposite. No, a mansion tax isn’t being considered, he said. However, he did manage to moot the raising the top band of Stamp Duty further, perhaps fiddling with Council Tax, too.

Election-winning politicians hate income tax. But is it really any fairer to tax property?

'Bracket creep', in which inflation pushes relatively modest earners (or, in this case, spenders) into more punitive taxation brackets previously reserved for the much better off, has turned Stamp Duty into a major house-buying hurdle.

Although the rates of tax have been fiddled with slightly, the £250,000 and £500,000 thresholds have remained in place since 1997, before the bull run to end all bull runs. In 2000, just 875,000 homes were valued in excess of £250,000. Now, that figure’s grown to five million. According to calculations by Halifax, if those thresholds had shifted to reflect house price inflation they’d currently be at £600,000 and £1.2 million respectively.

Calls to reform Stamp Duty have included a radical redefining of the tiers, a move from the slab structure to an income-tax style tiered structure of calculating payments, and a complete replacement with Capital Gains tax for 'first' homes.

An interesting recent suggestion by HSBC bank – as part of a report into the plight of the first-time buyer – is to shift the burden of Stamp Duty from buyer to seller.

The implication of the HSBC research is that the reintroduction of Stamp Duty for property purchases above £125,000 in March 2012 will distort prices around the deadline and then effectively kill off the ftb market completely. HSBC’s suggestion to make vendors pay the tax would remove the duty from first-time buyers completely and reduce the burden for anybody moving up the property ladder. Unlike the introduction of a Capital Gains Tax, it wouldn’t further blur the boundary between property as 'home' and property as 'investment' (or throw up questions about whether the cost upkeep/improvement should be treated as expenses). The only people to suffer, financially, would be downsizers and 'last-time buyers'. But it could be argued that they’d be best placed to make the greater contribution… they’d either be paying out of increased equity or, if they’d managed to make a loss, they’d be paying less than they’d have paid if the duty had been charged on the purchase (particularly after factoring in inflation).

The Government’s decision to tweak the calculation of Stamp Duty for buyers of multiple properties (using the average value of the purchases to calculate the band) will have encouraged investment in the private rented sector. Now, it’s time for proper thought and debate about how this outdated tax can reflect the needs of the rest of the market.

11 comments so far. Why not have your say?

Mark Wadsworth

Apr 06, 2011 at 13:09

"But is it really any fairer to tax property?"

Yes of course it is! If you pay a shedload of income tax, you get nothing in return. With Land Value Tax, at least those willing and able to pay the most tax get to live in the nicest houses in return. If you are unwilling and unable to pay into the system and just want to get money off other taxpayers (e.g. old age pension, unemployment benefit) then your part of the deal is to trade down to somewhere smaller or cheaper.

Seems very fair to me.

That said, SDLT is on its own a terrible tax, and will be one of the first to be rolled into Land Value Tax (along with council tax, business rates, inheritance tax, non-dom levy, CGT, TV licence, insurance premium tax etc etc). Then the year after that we'll hike the rate and replace VAT and the year after that National Insurance and in year four we'll scrap income tax as well.

Sorted!

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Bilbo Baggins

Apr 06, 2011 at 13:25

'One Hampstead specialist claims to have sold £50m worth of houses in a fortnight.'

Two property sales in as many weeks is hardly noteworthy.

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Bob

Apr 06, 2011 at 13:54

Somebody has to pay for Labour's dependency culture. It might as well be property owners as well as those people who work for a living. Of course, many people who own a property also work for a living but our scroungers often have neither a job nor a property and it seems to me that they are perfectly entitled to look to anyone and everyone to support them in the lifestyle they have adopted.

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Anonymous 1 needed this 'off the record'

Apr 06, 2011 at 14:37

Unfortunately, the property market is totally distorted, as soon as you have the Government paying peoples rents who are renting in the private sector you have a problem.

This should occur for a maximum of 6 months and then people dependent on Government handouts should be moved to Government housing whether in this country or more competitive units elsewhere in the EEC.

Further taxes on people who earn a living are purely an effort by the Government to try and buy votes from the people who do not earn a living.

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Jonathan

Apr 06, 2011 at 14:55

re: "The implication of the HSBC research is that the reintroduction of Stamp Duty for property purchases above £125,000 in March 2012 will distort prices around the deadline and then effectively kill off the ftb market completely."

How did they come to the conclusion it would kill off the ftb market completely?

Prices are dictated by how much people can borrow, so prices for FTB would just have to come down to what they can afford, this is an inevitable correction to the market that is now taking place. I don't see how anyone could come to the conclusion that 1% stamp duty would "effectively kill off the FTB market completely"

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Nick74

Apr 06, 2011 at 16:59

Ideally the seller would be taxed on the difference between the RPI linked price increase that the property should cost and the actual selling price, and if the selling price is higher then the difference should be taxed at the seller's marginal income tax rate.

Equally if the price has fallen then there should be income tax relief

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snoekie

Apr 06, 2011 at 17:38

Can we freeze MPs salaray and pension entitlement as of that date, and revert.

The racket arising from Westminster would drown out all other noises, and was it not the present lot who were remarkably silent about the raid that was made on pensions in the private sector, and now allow the LAs to add to the rates the amount of the shortfall in the value of the funds. It would sound very much like pigs squealing, because we are taking away their food trough into which they heaped in our money for them to sup on.

Will they refund the excesses that will inevitably happen when the stock market recovers? Yep, when hell freezes over.

Okay, different aspect, but this is a further tax on a purchase paid for by income that has been taxed and in respect of the higher end at higher rates, and by a partner in govt that has rich incumbents, but their motto is do as I say, not as I do.

The LD is even left of Zanuliebore when it comes to tax, and insane ideas about redistibution of wealth, but never theirs, and many of them have milked the taxpayers money to add to their wealth and standard of living.

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Tim Gould

Apr 06, 2011 at 18:12

HSBC - utter tosh!! Of course the 1% reintroduction will effect those FTB with the smallest deposits - but the banks (including HSBC) don't want to lend to those anyway - 3 lenders in market now offer 10% FTB deals - but in Feb 2011 99% of direct applications were declined by those lovely banks (but they kept those hard up FTB application fees)

Shame on you HSBC (and shame on me for banking with them!!)

Oh and as an estate Agent in London its worth noting that there are very few properties that cost less that £125,000 in any case!!

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Robert Dangoor

Apr 08, 2011 at 12:47

Bob Dylan is being asked to speak out on his tour in China, against the incarceration of the dissident artist Ai Weiwei. Why would he refuse?

The answer might be that he is afraid that his crispy notes might blow in the wind if he did!

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Paul 2

Apr 11, 2011 at 10:08

Anyone who has bought a house knows that house prices are determined by the market.

If buyers become able to afford to pay more as a result of stamp duty becoming payable by the seller instead of by the buyer then house prices will go up by the amount of the stamp duty that buyers no longer have to pay.

The only change will be that houses will appear to be even more unaffordable than they are at present.

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Malcolm Lowry

Apr 11, 2011 at 17:44

Paul 2 wrote:

"Anyone who has bought a house knows that house prices are determined by the market.

If buyers become able to afford to pay more as a result of stamp duty becoming payable by the seller instead of by the buyer then house prices will go up by the amount of the stamp duty that buyers no longer have to pay.

The only change will be that houses will appear to be even more unaffordable than they are at present."

Quite, and this point seems to have eluded the mainstream financial media. I bet HSBC understand that but for the banklers it's another prop to prices in support of their loan books! Oh I'm such a cynic.

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