Boris Johnson – the new British prime minister – has made some news within the property sector for the last few weeks. His target: stamp duty land tax.
Already last year, Johnson called stamp duty “absurdly high” and it did not seem to get out of his head during the Conservative leadership race. While he appeared to consider abolishing it for homes worth ₤500,000 or less and reduce it in the high price segment last month, he has now requested further information about shifting the liability to pay stamp duty from the buyer to the seller of a property. This proposal has loudly been made by the Association of Accounting Technicians (AAT), which head of public policy and public affairs commented: “AAT is naturally pleased that Boris has agreed to look at our long-standing proposal to switch Stamp Duty liability from the buyer to the seller.” Many people would agree that stamp duty needs to be reformed, but how might the market develop when this proposal gets implemented?
Widely Considered A Bad And Inefficient Tax
The majority of economists consider stamp duty a bad and inefficient tax. It increases the costs of moving, making it less appealing. A study by the Economic and Social Research Council found that increasing the tax rate by 2 percentage points reduces household mobility by almost 40%. Reducing stamp duty, therefore, seems like a sensible idea. It could bring movement in the market but, as others mention: in places such as London, demand is not the problem. Supply with the right houses is. A cut in stamp duty would fuel transactions and put more pressure on a limited housing supply. A greater number of transactions would then just push the prices higher, to the benefit of existing homeowners but the disadvantage of first-time buyers, who will most likely struggle with the increased mortgage burden.
So, Is Shifting Liability From Buyer To Seller Progressive?
Shifting the costs of stamp duty from the buyer to the seller is being advertised as a progressive idea, helping people to climb the property-ladder since they pay tax on the cheaper property they are selling, rather than the more expensive one they are buying. At the same time, it would save the exchequer about ₤700m, since there will be no need for tax reliefs for first-time buyers. But there are problems.
Firstly, downsizers are hugely disadvantaged by this regulation. Paying taxes on the expensive property you own and not a cheap one your buying, makes you think twice about moving into something smaller. Even more so, if you think about the fact that you are taxed twice since you already have paid higher levels of stamp duty when you first bought the property. Secondly, there remains the question if this regulation will actually help the buyer? What stops the seller from adding the higher stamp duty on the price? We will likely see rising prices which will eat up the possible discount of not paying stamp duty directly.
The only real advantage for buyers: fewer upfront costs. Yes, the mortgage will be bigger and harder to pay off, but upfront costs of legal fees, mortgage arrangement costs and taxes are a huge hurdle for buyers nowadays. Taking stamp duty off this list might enable more people to strive for their own property.