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Issue 1122, 23 September 2022. Subscribers: read the digital edition here
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From Merryn Somerset Webb, MoneyWeek’s editor-in-chief
Most prime ministers would look at the most recent stamp-duty receipts and be pretty pleased. In the first eight months of the year, £10.6bn was collected. In August alone, receipts hit £1.6bn, the second-largest amount on record (after £1.7bn in December 2021). Not to be sniffed at. Unless you are Liz Truss, who has a plan for this golden goose. It is (as far as we know) to slash or kill it.
This is fabulous news. Long-term readers will know that we consider stamp duty to be the worst tax in Britain (and given the choices available to us here that is saying something). It makes it hard for buyers to save up deposits – they have to come up with the cash for stamp duty, too. It makes it harder for people to move (as stamp duty has risen so we have stopped moving so often). This gums up both the labour and the housing market. Stamp duty is effectively a wealth tax – and a particularly distorting one at that. It should be abolished in its entirety (or at the very least shifted so that the seller – the one who has the cash to hand – pays it).
Don’t expect house prices to rise
Fans of stamp duty will say that abolishing it will cause a new nightmare: another round of house price inflation. There is some evidence that rising transactions lead to more house building in the longer run (and that cuts in stamp duty lead to rising transactions) but for now the supply of houses for sale (around 36 properties per agent) is knocking around long-term lows. If that doesn’t shift, and cutting stamp duty leads to a rise in demand, the price of every house for sale should rise in line with the scale of the cut – or perhaps by more.
Why? Because stamp duty must be paid in cash at the point of transaction. If, however, you can add it to your deposit, you can leverage it. Say you have a £100,000 deposit and an 80% mortgage. You can pay £500,000 for a house. Now say there is no stamp duty. Your deposit goes up to £115,000. And the price you can pay? That goes to £575,000. And in the main, the price paid for any one house in the UK is exactly equal to the maximum price the buyer is able to pay. This logic is all entirely correct. However, right now its effect should be more than balanced out by the great destroyer of house prices: rising interest rates.
Cancel stamp duty, don’t just cut it
With that in mind we would say that this the perfect time to not just cut but to completely cancel this horrible tax – and not just in England. In Scotland the equivalent of stamp duty (LBTT) is significantly more onerous at higher prices than in the UK (12% over £750,000). Anyone would think Nicola Sturgeon was trying to deter the well off from moving to Scotland (a shame given how few higher rate taxpayers live there at the moment).
This brings me to the other controversy of the week, the bankers’ bonus cap). In this week's magazine, Matthew Lynn argues it is right to get rid of it. I rather agree (free markets are almost always better than distorted markets – see above! – regardless of the context). But I wonder if the bankers will. I have a feeling they might prefer what they have been getting instead – higher salaries (non variable) have replaced performance related payments (variable). Stability and certainty have more value than usual at the moment – something that investors will be feeling as much as bankers.