How to make stamp duty a little less crazy
Stamp duty is a mad tax for all sorts of reasons, says Merryn Somerset Webb. But if anybody should have to pay it, make it the seller.
We hate stamp duty at MoneyWeek it'sa madness of a tax. The fact that ordinary people have to come up with lumps of real cash on top of their deposits every time they move house clearly makes people want to move house less often. It is a wealth tax that explicitly discourages mobility it makes moving expensive, and in doing so, it makes people worry about taking jobs outside their area, and it stops older people downsizing. The result is a classic example of the old saying that you get more of what you don't tax and less of what you do: it is fewer housing transactions.
One solution we have suggested here before is shifting the burden of the tax from those who don't have the cash (buyers) to those who do (sellers). The Yorkshire Building Society seems to think this is a good idea too. Itplans to formally suggest it to the government as a policy to be announced in the Autumn Statement with a view to taking first-time buyers out of the tax altogether (if you are only buying, you aren't paying) and increasing the total number of transactions in the market by about 16,000 a year.
The obvious riposte to this is to say that shifting the burden will make no difference to anything: after all, house prices are about what people can afford to pay. The total sums buyers can afford to pay won't change, so sellers will simply raise their prices to reflect the tax they will have to pay.
Yes and no. Stamp duty has to be paid in actual cash. So, say you are a buyer in the current market, with cash of £60,000. You can get a 90% loan-to-value (LTV) mortgage. If stamp duty didn't exist, you could pay £600,000 for a house. But it does. And if you buy a £600,000 house, the duty will be £20,000 which you don't have. So you have to buy cheaper.
Let's say you cut your expectations to a £500,000 house. Now your deposit is £50,000 and you have £10,000 left over for stamp duty. Whoops! That's not enough either. The stamp duty on £500,000 is £15,000. Hmm, how about you cut to £480,000? Nope. £460,000? Now you're there. Your deposit is £46,000 and the stamp duty is £13,000. See the point? It is all about leverage.
For the sake of £20,000 cash upfront, the buyer has had to spend £140,000 less on a house. It is debilitating stuff. Now let's assume the sellerpays. On sale, unless they are insanely over leveraged, they will have the cash to pay up. It will cut the cash they have for a deposit going into their next house, but as they will (hopefully) have more equity, and in the main be upsizing, this will matter less.
The ones who will take the hit are, of course, the ones at the end of the value chain the downsizers. But still, if you are worried about intergenerational inequality, you won't mind that much. I'd add a refinement to all this to prevent stamp from being a pure wealth tax, I'd only charge it on the capital gains section of the sale price. It isn't perfect, of course stamp duty will still be a rubbish tax but shifting the burden like this should help around the margins.