City fears rise in stamp duty on property over £1m

Property shares fell yesterday as expectations rose in the City that next week's Budget will see a hike in stamp duty.

It is thought that any increase would hit the higher level of duty, as Gordon Brown looks for more revenue-raising measures to plug the multibillion-pound hole that has opened up in public finances.

Pat Cannon, head of stamp duty at PricewaterhouseCoopers and a member of the Government's stamp duty steering group, predicted that the Chancellor would introduce a new band, for property worth more than £1m. Currently, stamp duty on all property worth more than £500,000 attracts a 4 per cent duty. Mr Cannon forecast a new rate of 5 or 6 per cent for property worth more than £1m.

He said: "The Government has a long-term ambition to bring our stamp duty in line with Continental rates, which are around 7 to 9 per cent. I think he [Mr Brown] will do something for first-time buyers, which he'll use for cover to bring in the higher rate. He'll present that as just something that will hit the odd top-end London buyer."

Mr Cannon said the Treasury may help the bottom end of the housing ladder by raising the threshold of zero-rating from the current £60,000 – the threshold has not been increased for 10 years – to some £120,000. The overall level of stamp duty has not been increased by Mr Brown since 2000, but before that, he quadrupled the top rate.

Steven McGrady, head of stamp tax at KPMG, agreed that a new top rate, for £1m properties, was on the cards. It would accompany measures to tighten up duty avoidance and the Treasury's stated aim of "modernising" measures for the tax, which may see it called something else.

"At 5 to 6 per cent, we'd still be behind other European jurisdictions. I think it [increase the top rate] is a distinct possibility. We thought it might happen for the last couple of years but this time Gordon Brown has to find money from new places," Mr McGrady said.

Stamp duty on £1m properties would primarily hit the commercial property market, leading to the sell-off in real estate shares yesterday. A research report from Credit Suisse First Boston warned that the hike would hit the net asset value of property companies and lead to transactions being brought forward to avoid the new rate.

John Gellatly, of CSFB, said: "We estimate that were stamp duty to rise by 2 percentage points, we would need to reduce our NAV estimates [for companies] on average by 3 per cent."

Canary Wharf shares closed down 4 per cent at 139.25p and Slough Estates also lost 4 per cent to 294p. British Land shares finished 5p off at 405.75p and Land Securities fell 5.5p to 727p.