Taxing times for home buyers

The tax take on property is now four times as high as when Labour came to power

One of the greatest beneficiaries from rising house prices appears to be the Treasury. The UK Housing Review, published by the Council of Mortgage Lenders (CML) and Chartered Institute of Housing this week, reveals that home buyers and owners paid almost £2bn more in taxes in 2004/5 compared with the previous financial year. This equates to a 41 per cent increase in the sums collected from stamp duty land tax and inheritance tax.

Revenues from the two taxes last year came to £6.5bn, with £5.5bn from stamp duty alone. The UK Housing Review's researchers calculate that the total tax take on property is four times as high now as when Labour came to power in 1997. The University of York, which carried out the research, calculates that taxes have risen more than if the Government had imposed capital gains tax on housing transactions.

The deputy director general of the Council of Mortgage Lenders, Peter Williams, says the growing tax burden on home buyers seems at odds with the Government's policy of expanding home ownership.

"That goal is in danger of being thwarted by growing cost, complexity and taxation measures," he says. Measures such as sellers' packs are expected to add £1,000 to moving house.

Concessions, such as increasing the entry-level stamp duty threshold, have not compensated for rising costs. Raising the starting point for the 1 per cent stamp-duty band from £60,000 to £120,000 has cost the Government £250m, the CML estimates. The value of the concession is falling, as rising property prices mean fewer homes sell for £120,000 or less.

Experts warn that the growing tax burden on home buyers is distorting the market. Properties just above stamp-duty thresholds are proving hard to sell, especially homes that would normally be valued between £250,000 and £270,000. Stamp duty is 1 per cent on properties valued over £120,000, but the tax rises to 3 per cent on properties valued over £250,000.

"There is no doubt it distorts the market," says Ray Boulger, senior technical manager at John Charcol, the mortgage broker. "It means you don't see houses marketed between £250,000 and £270,000 unless they are new builds, where there is a often a deal to be done or where the developer pays the duty."

A similar problem affects properties valued at £500,000 or more. Here stamp-duty rates rise from 3 to 4 per cent.

The jump is the more marked because duty is charged on the whole of the sale price, not only on the value in each band. So the tax on a property selling for £119,999 is zero, but £2,500 on a £250,000 home. That rises to £7,500.03 on a property selling in the next band at £250,001. A home selling for £500,001 attracts a tax of £20,000.40

According to Boulger, stamp duty is stealth tax. "Fiscal creep", where a growing number of properties fall into the higher-tax brackets due to price inflation, means the Treasury is collecting ever more from buyers. And rising property prices are subjecting more estates to inheritance tax, charged at 40 per cent on estates over £275,000. Unlike stamp duty, however, the tax is only charged on the value of the estate above the threshold, not on the whole amount.

Planning can do much to reduce the burden of inheritance tax. Families can arrange life assurance to cover the bill. Getting round stamp duty is more difficult.

Since the Government replaced stamp duty with stamp duty land tax, it has collected it through self assessment. At the margins, it might be possible for buyers to escape duty by agreeing to pay for fixtures separately. For a £260,000 home, £10,000 for carpets and curtains might be reasonable, but the tax man will look carefully at transactions around the margins.

To escape stamp duty, buyers need to make offers exclusive of fixtures and fittings. Their valuation will be on the same basis, so they will be able to borrow less. They might need a cash-back mortgage or higher loan to cover the shortfall.