CPS publishes 'Stamping Down'

Government should press on with stamp duty cuts, argues CPS

  • The Government is currently considering whether or not to reduce stamp duty in the coming months ahead of any election
  • New report by a former No 10 adviser argues that stamp duty on homes is a tax on mobility and aspiration, and calls for drastic cuts
  • Modelling shows that abolishing stamp duty on people buying a home to live in or raising threshold to £500k, and reducing other rates sharply, would drastically increase the number of housing transactions and spur significant new housebuilding
  • Stamp duty on people’s homes currently raises £5.1 billion in England, but eliminating it on 90% of properties below £500K and cutting it sharply above that would cost just £1.6 billion a year due to dynamic effects on revenue, new homes and planning gain from higher transactions
  • The CPS proposes levy on non-resident overseas buyers to help pay for the cuts and leaving other forms of stamp duty (e.g. on buy to let landlords or commercial property) alone

Stamp duty is one of the most unpopular taxes in the country, second only to inheritance tax. Since 1997, rates have risen from a maximum of just 1% to up to 12% for the most expensive homes. In the process, SDLT for primary residences (people buying a home to live in) has become not just unpopular but hugely damaging, acting as a handbrake on the housing market and raising decreasing amounts of revenue in the process.

The average home in England now pays £2,300 and in the South East pays over £6,000. During the recent Conservative Party leadership contest, there was near-unanimity that stamp duty needs to be reformed, with the figure of £500,000 often cited as the level below which no stamp duty should be charged.

There is now a debate as to whether or not the Government can afford tax cuts such as stamp duty or whether these cuts have to wait for the long term.

However, Alex Morton, Head of Policy at the Centre for Policy Studies think tank – recently nominated by Conservative MPs as the most influential think tank in Westminster – and the former housing adviser to David Cameron, now argues in the report Stamping Down that stamp duty has distorted the market to such an extent that the costs of cutting it are far lower than generally realised.

The evidence clearly shows that a 1% cut in stamp duty rates increases housing transactions by around 20%. It also shows that more housing transactions lead to more homes being built, as developers respond to market incentives and the fact that more people are in the market to buy new homes which makes it easier to sell new build properties.

This means that cutting stamp duty would increase transactions, partly increasing revenues to counterbalance lost revenue, but crucially also stimulates more homes at no cost and generates higher ‘planning gain’ taxes paid directly by developers when they gain planning permission on each new home.

Often, only the impact on revenue is looked at when working out the cost of higher or lower stamp duty. The report shows why this is too narrow a case and that these wider impacts need to be taken into account.

In total, the paper estimates the headline cost of abolishing stamp duty outright at £5.1 billion – but argues that this falls to £3.3 billion once the dynamic effects are taken account of.

However, it advocates instead for a system in which rates are broadly returned to the level in 2005 – with the stamp duty threshold raised to £500,000, then a 4% levy on the value above that up to £1 million, and a 5% levy on anything higher. This would only be payable on amounts above these thresholds (so a £600,000 home would only pay 4% on the £100,000 above £500,000).

The impacts of such major stamp duty cuts would mean that a £3.7 billion cost a year would be just £1.6 billion a year once these direct impacts were taken into account.

If  transactions were returned to their historic level through other reforms, the boost from stamp duty on top of this would be even higher, to the point where raising the SDLT threshold could be nearly cost-neutral if accompanied by a 3% surcharge on properties purchased by non-resident overseas buyers – i.e. as as investments rather than homes to live in.

The report warns, however, against raising stamp duty rates on buy-to-let or commercial property, which are already close to the point where they become counterproductive and risk boosting one part of the market at the cost of shutting down others. However, it argues any cuts should focus only on primary residences given the current state of the public finances.

This reform package would exclude 90% of homes from stamp duty completely, and provide a saving of at least £15,000 to every other homebuyer – galvanising a housing market in which over- and under-occupation of homes has become a huge problem, in large part due to the friction imposed by stamp duty.

Alex Morton, Head of Policy at the Centre for Policy Studies, said: “While the Treasury are right to be fiscally focused, they need to take into account the fact that stamp duty on homes has an impact on transactions, which means cutting this tax is cheaper than expected. We propose mean a far more appropriate rate for the most valuable homes – and taking nine out of 10 people who just want to buy a decent home for themselves and their family out of the tax altogether.”

Robert Colvile, Director of the Centre for Policy Studies, said: “It’s no coincidence that stamp duty is one of the taxes that people hate the most. It’s a huge barrier to people living in the kind of homes that best fit their families and their lives. And as our report has shown, the current sky-high levels are doing more harm than good.

“We urge the Government to take bold action to stamp down on stamp duty, and get the property market moving again.”

‘Stamping Down’ is published on Sunday 27th October and is available to read here.

For further information, or to book Centre for Policy Studies spokesmen, please contact the Centre for Policy Studies Press Office on 07852 952 917 or email [email protected].

Notes to Editors:

  • The Centre for Policy Studies is viewed by Conservative MPs as the most influential think tank in Westminster, according to polling by ComRes. Its mission is to widen enterprise, ownership and prosperity
  • Stamping Down’ was authored by Alex Morton and published by the Centre for Policy Studies
  • Alex Morton is Head of Policy at the CPS, overseeing our internal policy work. He was previously a Director at Field Consulting, but before that was responsible for housing and planning in the No 10 Policy Unit, including working on key policies in the 2015 manifesto. He was previously Head of Housing at Policy Exchange.

Date Added: Friday 25th October 2019