Merryn's Blog

Stamp duty: we must get rid of this ridiculous tax

Stamp duty on property is such a stupid tax, it's incomprehensible the government hasn't scrapped it, says Merryn Somerset Webb.

We've written frequently about how much we dislike stamp duty as a tax. If property is to be taxed on its capital value, we would much prefer to see a low and inflation-linked capital gains tax (CGT) on primary homes.

Not all of you agree (see previous postshere and here), but it seems to us that the fact that a primary home is currently the only thing you don't pay CGT on is hugely distorting to the market.

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If you pay 28% on all your other gains, why wouldn't you skew your investments towards residential property? That pushes prices up and contributes to all the nasty social effects we all understand.Stamp duty is also horribly badly structured in its current slab format and must surely be a deterrent to labour mobility.

All these thoughts were nicely confirmed by the cover story in The Times yesterday, which points out that at least one in four people are facing tax bills of at least £7,500 when they buy a house in the UK. Back in 2004, the average family lived in their house for 14 years before moving. Now, in part thanks to the fiscal drag of stamp duty (you pay 3% on the whole purchase price if you pay 250,000 plus for your house, which 40% of buyers in the south-east do), that number is 29 years.

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This is a tax that acts as an punitive wealth tax and, as The Times points out, is almost perfectly designed to ensure the inefficient allocation of housing. It is also worth remembering that stamp duty was introduced as a temporary tax back in 1694, and that when it moved from a flat rate to an tax based on value, it was supposed to only hit the rich. So much for that.

It still hits the rich harder than everyone else (buyers of a £2m house pay a stunning 7% in stamp duty), but these days it hits everyone else too. Add in all the costs of moving, says estate agent Ed Mead, and it can easily add up to 8% of the purchase price of a house in the south-east. It is hard to imagine that the government doesn't know how rubbish this tax is. That makes it impossible to see why they don't do something about it, and completely incomprehensible that, instead of talking about removing it, they prefer to talk about piling more property taxes on top of it.

There has recently been a stamp duty change in Scotland. A bill has been passed that will remove the slab system on stamp duty, making it work rather more like income tax, in that you pay different rates on different bits of the purchase price. This will take effect next year.

However, before anyone in Scotland starts to celebrate, they might note that the tax in its essence remains unchanged. The only real effect will end up being new bands that raise bills for those buying expensive houses. For example, as one expert explained to the FT, someone buying a £700,000 house currently pays £28,000 in stamp duty, but, under the suggested tax bands, they will either pay £39,000 or £42,250. There's a hint for you of just what Scotland plans to do with its new tax raising powers.

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