David Prosser: Time running out for stamp duty saving

Outlook The recovery of the UK housing market has never looked sustainable and the latest lending figures suggest it may already be beginning to run out of steam. The number of mortgages for house purchase agreed in September was only marginally higher than in August, The Council of Mortgage Lenders reports, and lower than July's figure. And while we're still up significantly on the same months of last year, the low base makes the comparisons pretty meaningless.

The latest data has prompted calls for an extension of the stamp duty concession, which entitles property transactions worth less than £175,000 to escape the tax, beyond the end of 2009, when the threshold falls back to £125,000. The Treasury will be reluctant to heed such calls, given the state of the public finances, but they are worth considering.

The killer statistic in the CML data is that the average loan to value of a first-time buyer mortgage is around 75 per cent – it was 84 per cent this time last year. House prices may have fallen, but a 25 per cent deposit is still a huge sum for property market entrants to find.

The stamp duty concession seems to be helping. Despite the need for larger deposits, first-time buyers accounted for more than 20 per cent of house purchases last month, says the National Association of Estate Agents, compared to only 10 per cent in October 2009. And the CML's numbers suggest a third of these first-time buyers would be paying stamp duty were it not for the higher temporary threshold.

The implication is the number of first-time buyers may fall off sharply in the new year, once the concession has come to an end. Lower interest rates provide some comfort – the Bank of England's latest inflation report yesterday suggests rates may stay at record lows for even longer than expected – but if you're buying for the first time, the money still has to be found for a deposit. Stamp duty costs add to the challenge.

That's the case for extending the stamp duty concession. The counter-argument is the CML's data suggests two-thirds of first-time buyers would be unaffected by sticking with the current schedule for a return to the £125,000 level – and that with debt rising, we have to start unwinding stimulus schemes such as these.

How about a compromise option? One aspect of stamp duty has always been ridiculous – you pay the duty on the full amount of the transaction value, rather than just the value above the threshold. So in normal times, you pay no duty on a £124,000 purchase, but £1,260 on a £126,000 purchase at the 1 per cent rate. Why not apply the rules that govern almost every other kind of tax, where you pay only at the marginal rates? That would reduce the bill on the £126,000 buy, say, to just a tenner.