Brown helps - but not enough

The industry wants proper stamp duty reform - not just tinkering. Stephen Pritchard reports
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The Independent Online

Gordon Brown is not known as someone who grants concessions lightly. But in his Budget last week - widely regarded as the precursor to a general election - the Iron Chancellor came to the aid of hard-pressed homebuyers.

Gordon Brown is not known as someone who grants concessions lightly. But in his Budget last week - widely regarded as the precursor to a general election - the Iron Chancellor came to the aid of hard-pressed homebuyers.

The most dramatic move was the Chancellor's decision to double the threshold for paying stamp duty land tax to £120,000. But although the measure appears generous and will help some first-time buyers, it falls short of the demands made by many property market commentators.

The new threshold has failed to bring stamp duty thresholds in line with property market inflation. Stamp duty thresholds were last increased -- to £60,000 - in 1993. A property that would have just slipped under the stamp duty threshold then would now cost over £150,000, according to house price watchers.

At this level, Mr Brown's changes will do nothing to help. The Treasury has stopped short of a wholescale reform of the stamp duty system, an action that would be backed by much of the property and mortgage industry.

Bringing the starting point for stamp duty in line with today's prices would mean setting it at £156,900. The Council of Mortgage Lenders calculates that last year, 230,000 homes changed hands at prices between £120,000 and £250,000.

Critics of the existing system point out that it is not just the levels of stamp duty that are an issue. The Chancellor has not touched the 3 per cent threshold that comes into effect at £250,000, or the 4 per cent charge for properties costing £500,000 or more. Nor has he addressed the way that the tax is levied at the higher rate on the full value of the property. Stamp duty, unlike income tax, is not progressive. That means that a buyer paying £250,000 for a house pays £7,500 - the 3 per cent rate - whereas someone paying £245,000 pays £2,450, or the 1 per cent rate.

According to the mortgage broker Charcol, the tax causes distortions in the housing market, making it hard to sell properties that are priced in the region of £20,000 to £30,000 above each tax threshold. This is not a problem that Mr Brown's changes announced last week will address.

The Chancellor has acted to deal with another problem caused by increased property values: the number of estates brought into the inheritance tax system. The Government is increasing the threshold for the tax - which is levied at 40 per cent - to £275,000 from April.

This will increase to £285,000 in 2006/7 and to £300,000 in 2007/8. According to Mr Brown, 94 per cent of estates will not pay inheritance tax, as a result of the changes.

Nonetheless, the increases still fall short of recent house price inflation. Key Retirement Solutions, an independent financial adviser specialising in equity release from property, calculates that the average homeowner could find their estate caught by inheritance tax within 12 years. In the South-east, this could happen within four years, and in London, within just two years.

Dean Mirfin, a director at Key Retirement Solutions, says that the Government plans to increase the inheritance tax threshold by 4.5 per cent a year. But this will be well below the average growth rate of 5.8 per cent over the past 10 years. The result is that the new inheritance tax thresholds will slow down but not reverse the trend of more estates paying the tax.

The Budget also contained the promise of further help for first-time buyers, through a new form of co-ownership. The Treasury wants to develop a shared-equity system which will allow first-time buyers to arrange 75 per cent of the finance for their properties commercially, with the balance made up of a Government-backed loan.

The new financing arrangements are being developed with the Council of Mortgage Lenders and are expected to help 100,000 new home-buyers. As yet, though, the Treasury has provided little further detail, although the measure is expected to be an extension to the Homebuy equity loans targeted at key workers. The new scheme, according to the CML, will extend the number of buyers who are eligible, but the numbers qualifying for the help will remain modest.

In a parallel move, the Chancellor announced plans to build new homes for sale on existing council estates. Again, the intention is to help first-time buyers and others on lower incomes by providing more affordable housing. The Government will set up nine pilot projects to test out the idea.