Move to scrap stamp duty welcomed

It's been quite some week for the Tories, with first the pledge to raise the inheritance tax threshold to £1m, and then the pledge to remove stamp duty for first-time buyers who purchase a home for under £250,000.

While the decision to abolish stamp duty for first-timers didn't grab the headlines in the same way as IHT, it is a move a whole host of organisations have campaigned for in recent years, as house prices have rocketed, pricing out those on low incomes – and is sure to be a crowd-pleaser.

For years, the growth in the housing market has meant the average cost of a home has been surpassing the threshold for stamp duty – known as fiscal drag – leaving more people snared into paying a high tax on the property they are trying to buy, and, in turn, netting a tidy revenue for the Government.

According to HM Revenue & Customs figures, total stamp-duty revenue from residential property sales rose by 40 per cent in 2006-07 to a record £6.4bn.

Stamp duty is, for most, the largest economic barrier to entering the housing market; Halifax figures show the average first-time buyer pays £168,770 for their property, incurring a 1 per cent stamp-duty bill of £1,688, while in London, the average price paid is £279,659, which means a 3 per cent stamp duty bill of £8,930.

While many lenders have worked hard to find new initiatives to help people get on the property ladder, the Government has made little change to this tax, even though this would be one of the easiest ways to give struggling first-timers a much-needed leg-up.

As Melanie Bien from broker Savills Private Finance points out, over the years, the Government has merely "tweaked thresholds, doing little of real significance," while the Tory plan, she adds, is a whole lot more drastic – "and a whole lot more welcome".

That said, while the notion of abolishing stamp duty for first-time buyers sounds good in theory, as with all these things, the devil will be in the detail.

For starters, there is, as yet, no given definitions of who classes as a "first-time buyer". "What is the situation where a couple are buying together for the first time and one of them has previously owned a property but the other hasn't?" asks Ray Boulger from broker John Charcol. "Will they count as first-time buyers, and if not, is one being discriminated against?"

Another unfair element of the current system which needs to be addressed is the way in which the thresholds apply, as stamp duty is not tiered in the way that most other taxes are.

Any change to the stamp duty system would need to take this into account, perhaps by levying the tax in progressive slices, much like income tax.

Furthermore, while the Tory proposals to help first-time buyers are to be welcomed, there's a feeling that a reduction of the stamp duty – or abolition – across all transactions in the residential property market would be more useful.

As Stephen Ludlow from estate agency Ludlow Thompson points out, stamp duty creates some "particularly nasty side-effects" which will not be relieved by exempting first-time buyers.

"Stamp duty makes the cost of exiting and re-entering the housing market prohibitively expensive, and this can restrict labour mobility, as selling up to buy in another part of the country to pursue a job can end up being just too expensive," he says.

"The cost to 'empty nesters' of selling a family home and buying a smaller home is so substantial that it puts them off – restricting the number of family homes available," he adds.

There's a very good chance that by extending stamp-duty reductions beyond first-time buyers, this may well create more knock-on benefits to the UK economy as a whole.

With a pre-Budget report looming, we can only wait in anticipation to see what announcements, if any, are made by the new Chancellor Alistair Darling; we can only hope he's got something up his sleeve.