It was, George Osborne said, “a badly designed system that has distorted our housing market for decades”. But stamp duty, reformed overnight, has also fast become one of the Chancellor’s golden geese.
By scrapping the “slab” system – where a single tax rate is paid on the entire purchase price of a house, in favour of a “slice” system – where successive bands of the purchase price are taxed at increasing rates – Osborne is betting that he hasn’t killed it.
In fact, he has made the homebuyers’ tax look a lot more like income tax, an idea borrowed from a fiscally-liberated Scotland, whose land and buildings transactions tax (LBTT) will be introduced in April.
Even though it shows signs of cooling at the top end, the housing market has been lucrative for successive chancellors. By raiding the wealthiest two per cent of homebuyers, this move is calculated to be less hassle than a root-and-branch review of the 23-year old council tax bands, less invasive than a recurring mansion tax and evidence that “we are all in this together”.
It also throws down the gauntlet to Ed Balls. If Labour wins next May, would the new Chancellor levy an annual tax on homes worth more than £2m in addition to higher stamp duty costs?
The key number for homeowners in London and the south-east of England is £937,500, the value above which stamp duty bills rise.
The marginal rate of 12 per cent over the threshold of £1.5m means someone buying a £5m house will face a stamp duty bill of £514,000 instead of £350,000.
Osborne’s focus is lower down the property ladder, though, where an average-priced £275,000 home would cost £4,500 less in tax. His hope is that less duty will allow first-time buyers to put more money towards a deposit, making it easier to reach mortgage lenders’ loan-to-value criteria. In practice, it could drive up prices.
Craig Leslie, a partner and head of stamp taxes at accounting firm EY, said the change would have a “significant smoothing effect on existing price distortions in the housing market around the existing thresholds” that mean few transactions currently take place just below the £250,000 and £500,000 levels.
John Cridland, director-general of the CBI, predicted that the move could help address Britain’s housing shortage if it spurred more small housebuilding firms back into action.
However, Trevor Abrahmsohn, who runs north London estate agency Glentree, said the changes would hit hard those people looking to buy properties north of £2m, a market that has already been softened by the mansion tax threat.
Osborne is taking a risk. Successive chancellors worked out that the best thing to do with property taxes was as little as possible. Because the one per cent stamp duty threshold was last increased in 2006, more and more homebuyers were dragged into paying as prices rose, only going into reverse during the housing crisis. If the £125,000 threshold had kept track with rising house prices, it would have gone up to £145,000 and the three per cent rate would cut in at £295,000, instead of £250,000. Stamp duty land tax (SDLT), which is derived about two-thirds from residential sales, raised £6.9bn in 2013 and £9.4bn in the last financial year. Illustrating its significance, this year it is forecast to overtake tobacco duty by bringing in £11.5bn, rising to £19.5bn in five years’ time.
The reforms threaten to crimp earnings but not reduce them significantly. The Office for Budget Responsibility predicts that stamp duty will be even more important to the Treasury in five years’ time, increasing from 0.6 per cent of GDP this year to 0.9 per cent.
“This is driven by an increase in the effective tax rate, as price growth pushes more into higher bands and a rise in residential property transactions to a level consistent with its historical average by the end of the forecast,” the OBR said.
Osborne’s new tax rates will cost him £3.7bn over the next five years – echoing the pledge that 98 per cent of house buyers will be better off. At the same time, the OBR has trimmed its forecast for this year’s stamp duty receipts by £1.2bn, largely reflecting the slowing volume of housing transactions. However, over the five-year period, it has revised up its forecast for the tax take directly attributable to rising house prices. That extra £3.5bn almost offsets the cost of the Chancellor’s shake-up.
These numbers assume the housing market remains healthy, particularly at the top end. The Chancellor is also betting that where house buyers see stamp duty falling – which is most of the market – they will be encouraged to move house more often.
It is not the first time he has tinkered. In March 2012, he announced that properties sold for more than £2m would be subject to a new seven per cent rate. At the same time he said that duty on residential properties over £2m and bought through a company would increase to 15 per cent.
Two years later, those properties bought through a so-called “corporate envelope” and worth £500,000 or more were slapped with the same 15 per cent levy.