Rachel Reeves is considering a number of ideas to replace stamp duty – including a national property tax – in next month’s Budget after Tory leader Kemi Badenoch piled on the pressure over the levy.
In her speech to the Conservative Party conference on Wednesday, Badenoch delighted her MPs and delegates with an eye-catching pledge to abolish the payment made when purchasing a home, which would cost £9bn.
Stamp duty land tax is criticised for holding back the housing market as it adds a significant cost to buying a home. The good reception Badenoch’s announcement received has now piled the pressure on Reeves to reform the tax.
However, the Treasury keeps any measures closely guarded in order not to free the housing market, as buyers would likely wait if they believed a significant change was coming.
Experts believe Reeves is looking at reforming or scrapping stamp duty at the upcoming autumn Budget, with suggestions she could replace it with a different form of taxation.
But with the pressure to fill a £40bn hole in the public finances whilst not raising income tax, VAT or national insurance, she is more likely to reform or replace the tax rather than abolish it.
The Chancellor is said to be looking at tying any announcement to an overhaul of council tax, to try to create a more progressive and agile property taxation system.
David Hollingworth, associate director at L&C Mortgages, said: “The cost of stamp duty can be substantial, particularly on higher value property. Reform of the approach to stamp duty and council tax could have merit in the longer run, but deploying it could pose a shorter-term hit to revenue.”
So what options are on the table? Here, The i Paper looks at all the potential outcomes.
How does stamp duty work
The amount you have to pay is tiered, starting at 2 per cent on property values of between £125,001 and £250,000, working up to 12 per cent on property values over £1.5m.
First-time buyers do not have to pay stamp duty on the first £300,000 on their first home, and they pay 5 per cent on anything between £300,001 and £500,000. After that, the regular rates apply.
Replace it with an annual property tax
One widely reported way Reeves is considering reforming stamp duty is by replacing it with a different kind of property tax, such as an annual tax paid on homes over a certain amount.
One proposal said to be under review by the Treasury, set out in a policy paper by Tim Leunig at think tank Onward, involves a national proportional property tax on homes valued over £500,000.
Applying a rate of 0.054 per cent levy on properties over £500,000, with a 0.0278 per cent supplement on house values over £1m, would raise around the same revenue as stamp duty.
It is estimated that around a fifth of property sales would be impacted by the new tax, compared to around 60 per cent of house sales which are currently subject to stamp duty.
Leunig also proposes using a similar proportional tax system, set at a local rate, to replace council tax.
Shaun Moore, tax expert at wealth manager Quilter, said this would address the issue of taxes not reflecting up-to-date property values. Quilter’s figures show that a property tax – in the current suggested format – would save people considerably compared to stamp duty and council tax payments.
It was based on a Southampton property in band D for the £450,000 and £600,000 homes and a Southampton home in band H for over £1m, assuming 5 per cent rises. It assumed regular rates – they are different for first-time buyers.The lower the property value, the higher the proportional savings.
“Applying rates that rise with property value would bring a closer link between what a property is worth and what its owner pays, reducing those long-standing inconsistencies,” Moore said.
“However, it could prove challenging for those who are asset-rich but income-poor – for example, long-term owners who have seen the value of their home increase sharply, but whose day-to-day finances remain modest.”
Such reform would be hugely ambitious – but experts and politicians have long acknowledged the council tax system is out of date, and stamp duty clogs up the housing market.
A proportional property tax would be more progressive and, while it would hit richer homeowners in London and parts of the South, the change would give the Chancellor the opportunity to show her focus is on taxing wealth, not work – something her Labour base would no doubt welcome.
But the timing of this would be tricky. Any changes to stamp duty have to happen almost immediately in order to prevent huge disruption to the housing market and there would then likely be a lag before the new tax is introduced, as it would require legislation.
Replace it with a mansion tax
Rumours have suggested the Labour Government is considering a more crude form of wealth tax – a capital gains tax (CGT) on primary homes valued at more than £1.5m.
The so-called “mansion tax” could see homeowners with properties worth this value required to pay CGT on any profit over this amount when they come to sell their house.
CGT is currently charged at 18 per cent for basic-rate taxpayers and 24 per cent for higher-rate taxpayers, although it has not been specified how any rate would apply under any new policy.
This tax would impact wealthier people, but, without the longer-term reforms to property taxation, could just be seen as a controversial money grab from the Treasury that could slow down the housing market and breed resentment from voters who do not see their primary homes as assets.
It would also rely on the sale of property in order to generate income for the Treasury.
Laith Khalaf, head of investment analysis at AJ Bell, said: “It would be hugely surprising if Reeves presses ahead with a mansion tax, given the public outcry it would likely provoke.
“A mansion tax set at a high level would naturally cause people to worry it was just the thin end of the wedge, and the next time the Government needs a bit of money, they could just lower the threshold.”
He added that it could just end up stalling the higher end of the housing market, acting in a similar fashion to stamp duty.
“Those with properties which might fall foul of the tax would be inclined to sit on them for longer, leaving a log jam in the housing ladder below them.”
Increase the stamp duty threshold
One way the Government could help boost the housing market without actually scrapping stamp duty would be to increase the threshold so that fewer buyers are impacted.
Experts believe this is a more likely outcome, as it will cost the Government less while still having a positive impact. However, there has currently been no indication of what the thresholds would be raised to.
Richard Dana, chief executive of mortgage and savings platform Tembo, said: “The current £300,000 threshold leaves many buyers facing bills of more than £6,000 on top of already daunting deposits and mortgage requirements.
“Raising the threshold would give first-time buyers certainty and better reflect the reality of higher property prices, particularly in urban areas.”
Abolish it altogether
It looks unlikely that the Chancellor would abolish stamp duty all together.
The Treasury needs to raise extra funds and removing the tax by introducing a replacement would mostly benefit those buying and selling high-value property, at the expense of having to find this revenue elsewhere – through public service cuts or higher taxes in other areas.
Stuart Cheetham, chief executive of lender MPowered, said: “Stamp duty generates billions for the Treasury every year. Badenoch’s announcement [to scrap stamp duty] will fly when it comes to headlines, but on every other count it’s unlikely to get off the ground.”
Stamp duty being scrapped would initially save house buyers money, experts say, which could lead to a spike in property transactions, leading to growth in the housing market.
Hollingworth, of L&C Mortgages, said: “Abolishing stamp duty altogether would certainly be well received by homebuyers and remove another barrier to home ownership.
“The hope would be that an increase in transaction levels would be positive for broader growth.”
However, some have warned that increased activity in the housing market could lead to prices rising, which in the long term could minimise the impact of scrapping stamp duty.
Marc von Grundherr, director of estate agency Benham and Reeves, said: “Should the Government take that step, we can expect a sugar rush of sudden house price inflation as buyer activity is supercharged like never before”.
The Treasury was contacted for comment.
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