Our hopes and dreams for Philip Hammond

Philip Hammond © Getty Images
Philip Hammond: should replace stamp duty with capital gains tax

The list of taxes that need reform is a very long one. But there is one tax that has been at the top of the list for well over a decade now: stamp duty.

The government will tell you that it has reformed it: a few years ago it dumped the slab system and changed all the rates. Now when you move up a band you only get charged the higher rate on the value of the house over the threshold as opposed to on the whole lot. This represented progress at the time. But with each forward step we got a backward step. Rates were increased massively at the same time, so that anyone buying a house costing more than £937,000 paid more. And they have gone up since.

The results are starting to be seen.  An article in the FT this week points to the way in which the owners of London houses have taken to “saving on higher stamp duty and house purchase costs by waiting to buy an adjoining property and knocking through.” You might think that sounds like a lot of effort. But look at the savings and you will see the point. Own a £4m flat, buy one next door for £4m and make them into one and your stamp duty bill will be £513, 750 (which seems nuts in itself). Sell the first and buy a bigger £8m house and you are on the hook for £873,750.

The Daily Telegraph picks up the story too. High duty rates are “restricting the transactions, preventing older owners from downsizing, adding to house price inflation and distorting the planning process” says Olivia Rudgard in the paper.

At the same time the complexity of the rules around the new 3% additional rate for second-home owners is “causing chaos for buyers sellers and their lawyers”. What, for example, to make of the case of Phyllis and Alan Black, who can’t sell their house because it comes with a large annexe? The annexe counts as a separate house and so attracts an extra three percentage points of tax.

There are a lot of really dreadful taxes in the UK (see my column on the matter here) but add all this up and stamp duty is close to the worst. It acts as a punitive wealth tax. It stifles labour mobility. It prevents people from trading up and down. And now it has been so fiddled around with it’s hard to comply with too.

Our hope (a forlorn one, I know) is that Philip Hammond will have a go at addressing all this in his Autumn Statement. Our dream is that he will replace it with an inflation-linked capital gains tax on primary homes. That would get rid of all the mobility problems (you pay tax on gains rather than on existing wealth) and possibly make a start on bringing down house prices too: if you have to pay capital gains tax on your house in the same way as you do on other assets, you will have less incentive to throw all your cash at your house.

  • ABlivit

    Quite how you reach the conclusion that charging CGT on primary residences will help mobility is beyond my understanding. Forgive me, but I don’t have a lot of sympathy for anyone able to afford a £937k+ home (the extra stamp duty will hardly make or break such a purchase – it’s simply a tax on wealth). Your proposal would be political suicide and if introduced I, for one, would vote with my feet and make my holiday home (in Ireland) my permanent residence. Of course, depending on how the Brexit negotiations go I may do that anyway! Stamp duty in Ireland btw is just 1%.

  • Mark Bishop

    I agree that stamp duty is a bad tax, since it penalises and hence discourages behaviour that government should be promoting: moving home. Encouraging people to move so they live near their work or don’t occupy homes too big for them (take a bow, empty-nesters and the elderly) is a sensible supply-side policy, so logically there should be tax-deductibility for moving costs, rather than a tax on relocation as currently.

    However, this logic says your alternative proposal – capital gains tax, albeit indexed to inflation, on property sales – suffers the same flaw. Property price booms would turn into bubbles as owners clung on to properties that ill suited them, hoping to defer moving until prices slumped. Ageing widows would rattle around in family homes they could barely afford to heat or maintain rather than release them to the marketplace and take a huge CGT hit.

    Governments should tax that which is undesirable and undeserved. If a person’s home increases in value ahead of inflation, this imposes a cost on someone else – the next generation of prospective homeowners – and is also unearned, in that it is the product of economic growth and a positive externality of government investment (think price surges around Crossrail stations), so taxing that gain is logical. But the tax should take place irrespective of whether the homeowner moves. Not only is this more equitable, sharing the burden, rather than placing it on those needing to move – but it actually encourages people to move out of hot spots or oversized homes to avoid the tax.

    A tax based on property values is progressive and enforceable. In my view it’s one of the few taxes that is morally defensible, promotes desirable behaviours and is easily collected.

    • LG

      Quite right. Tax should be directed more towards accumulated wealth, rather than at present taxing effort and earnings.