It’s well known that a healthy housing market leads to a healthy economy, so the question the … [+]
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Figures released in October by HM Revenues & Customs (HMRC) revealed that stamp duty revenues were notably down year on year, with receipts dropping by 7% to £11.9 billion in the financial year ended April 5, 2019. This all comes just a couple of years after record highs for stamp duty receipts. In 2016–17, they peaked at £11.7 billion, although that in part was driven by a surge of people completing property transactions to beat the aforementioned government policy changes.
The significant drop raised alarm bells for economists, although few would call the numbers unexpected. Recent government policy changes meant the first annual decline in stamp duty revenue since the financial crash of 2008 was all but inevitable, but as I’ll get to further down, this actually might prompt a necessary conversation on the tax that could positively impact the house market. First though, how did we get here?
First-time buyers
The most recent key change was brought about in 2017, when stamp duty for first-time buyers was all but abolished. Those purchasing their first home up to a value of £300,000 were no longer liable for stamp duty at all, whilst those splashing out up to £500,000 still qualified for an exemption on the first £300,000 spent. This encouraged buyers, certainly, but also hit stamp duty income as a consequence.
Yet that’s just part of the story. By HMRC’s own figures, the stamp duty exemptions should have accounted for a drop of just 3%. In fact, in a House of Commons paper published as recently as November 2018, the expectation was this would cost no more than £560 million a year.
What, then, has led to the rest of the fall? A combination of contributing factors at play, it would seem.
Contributing factors
Further stamp duty changes have hit the top of the market, with raised rates for those buying a second home, or a particularly expensive property. This has slowed down the premium end of the business, and inevitably that has had a knock-on effect down the housing chain.
Although this was only implemented in 2014, its slow but sure impact is now being felt, particularly in London, where house prices have been falling for 12 consecutive months. That’s the strongest decline in a decade. The higher end of the market of course also generates a sizeable amount of receipts even without any knock-on effect, and those receipts have been falling. Demand is being suppressed, and that’s affected the money coming into the Treasury.
A September 2019 report from the Office for Budget Responsibility has noted that already this year, stamp duty revenue is down by 5.9%, blamed on “the slowing housing market”. If the market continues at its current rate stamp duty revenue is likely to decline further. But the caveat to this is reflected in the (albeit slimly) increasing house prices and transactions of the past few months.
It’s well known that a healthy housing market leads to a healthy economy, so the question the government should be asking is not how to reverse stamp duty misfortunes, but how to catalyse a market that’s clearly been in stagnation. It’s the longer route to increase stamp duties, but by far the more sustainable.
Two schools of thought
The first option would be to abolish stamp duty outright, and there certainly is precedent for it. When stamp duty on transactions up to £300,000 was abolished back in November 2017, it helped save first-time buyers an estimate £400 million in the 12 months since the legislative change came into force.
The second option, and generally preferred, is to reduce stamp duty. An analysis released in August from buying agency Ludgrove estimated that a 36% cut to stamp duty across the board would produce a 40% increase in transactions. This in turn would generate £1.44 billion in tax revenue and £8.36 billion in business revenue. As Ludgrove chief executive Fraser Slater clearly puts it, “Our analysis demonstrates the effect of what economists describe as ‘The Laffer Curve,’ namely that tax cuts can generate more tax revenue and equally importantly more economic activity–upon which taxation itself depends.”
Savills released their own analysis shortly after, cautioning that any cuts to stamp duty would lead to a fall in tax revenue that would have to be recouped through other taxes. But in echoing the corroborative analysis, argues that the right balance of stamp duty cuts could catalyse transactions whilst keeping costs to the Exchequer to a minimum.
Most recently, an October report from the Centre for Policy Studies levied the criticism that stamp duty is a heavy tax on mobilisation, with their modelling showing that either abolishing stamp study entirely, or drastically cutting the levy, raising its minimum threshold to £500,000 and reducing other rates would result in a surge of new housebuilding and transactions across the market. But the report also argues against abolishing the tax entirely. Stamp duty brings in billions each year for the U.K. economy–£135 billion between fiscal year 2000/01 to 2017/18 to be exact. The report instead advocates reducing the tax to 4% on properties up to £1 million, and a 5% tax on anything higher, placing the estimated total cost of cuts at £1.6 billion after accounting for dynamic factors, namely the rise in transactions that would result. In theory this should work out as cost-neutral, as higher transactions would generate higher stamp duty revenue.
Final thoughts
Though we all hate hearing it, Brexit has for a couple of years now been blocking growth in this industry, and people have been getting tired of waiting, hence the small rise in sales. With an end possibly in sight, and with patience very much coming to an end, chances are that they will respond overwhelmingly positively to any break that allows them to buy and sell with confidence despite Brexit uncertainty.
So perhaps, instead of concerning themselves with a short-term view of filling the exchequer coffers, the government should be actioning legislation that reduces the tax burden on buyers as a tactic to actively encourage growth in the housing market. The resulting surge in transactions could bring a net gain that is both sustainable and long term, for all parties involved.