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Housing and other stamp duty

Stamp duty is a tax levied on the transfer of certain assets or properties. The term originates from legal documents being physically stamped to verify that a transaction had been officially recorded and the tax paid [link 234].

The main form of stamp duty that most people encounter in the UK is Stamp Duty Land Tax (SDLT) which is applied to purchases of property and land in England and Northern Ireland (Scotland and Wales have very similar taxes which are administered and collected by their devolved administrations) [link 235].

SDLT is applied to any home purchased for more than £125,000, with the rate progressively rising in brackets (like Income Tax) from 2% on the first £125,000 over the threshold to 12% on any amount exceeding £1.5 million. From July 2020 to March 2021 a temporary Stamp Duty “holiday” was in effect, as part of the Government’s measures to cope with the economic impact of Covid-19, during which the threshold for having to pay any SDLT is increased to £500,000. First-time buyers are entitled to a discount if they purchase a home for less than £500,000 while purchases of second homes are subject to a 3% surcharge [link 236]. SDLT rates are somewhat lower for purchases of non-residential property, including shops, offices, farmland, as well as any purchase of six or more residential properties in a single transaction [link 237].

Stamp Duty is also applied to the purchase of shares in UK companies, called Stamp Duty Reserve Tax (SDRT) if the shares were bought electronically [link 238]. This is applied at a rate of 0.5% on the purchase of shares or share options.

Stamp duty hinders mobility.

Because stamp duty is a tax on transactions it is a virtually perfect example of the economic concept of “deadweight loss”: the existence of stamp duty means that some transactions at a price which would be mutually beneficial to buyer and seller cannot be made because the application of the tax must be accounted for in the price[link 239].The average house price in England, as of August 2020, is £256,109. If SDLT were applied at the usual rates, the buyer of an average English house would have to pay £2,805.45 [note 240] within 14 days of completing the transaction, a significant extra expense. This is even more pronounced in expensive areas: the average house price in London is £489,159 which would incur a stamp duty liability of £14,457.95 [note 241], effectively a surcharge of nearly 3% [link 242]. Furthermore, since most people buy a house with a mortgage and only pay a fraction of the total price up front, SDLT is proportionally an even bigger addition to the up-front cost of a purchase.

The responsibility for paying stamp duty falls upon the buyer so the main effect of it is to make house prices – already difficult to afford for most people – even higher. In terms of the incidence it has been estimated that about 60% of the cost of SDLT is borne by the buyer with the remaining 40% borne by the seller in the form of them accepting a lower sale price than they otherwise might [link 243].

The existence of SDLT distorts the housing market and hinders the efficient distribution of housing stock. In addition to saving up for a deposit, first-time buyers have to find several thousand more pounds to pay stamp duty; anyone seeking to move house will be discouraged; people who want to downsize may be put off by the extra cost imposed by stamp duty – thanks to stamp duty you cannot simply sell your house and buy an equally priced one because the tax raises the cost of purchases as such. SDLT therefore incentivises staying put over moving even if moving would be beneficial, with fewer properties changing hands than they otherwise would. The effect of this can be very large: according to the Adam Smith Institute, past research has estimated that the impact of a 1% increase in the taxation of property transactions can reduce the volume of transactions by about 10% [link 244]. Thanks in part to this distortion of the market, just over half of all owner-occupied households in England are under-occupied according to Government measures, defined as the household having two or more bedrooms in excess of the number needed to accommodate the number of people living there [link 245].

Stamp duty on shares has a similar impact which distorts the stock market. Taxing the transaction of shares produces an incentive for shareholders to retain their current investments instead of trading, even if trading would otherwise produce a more efficient allocation of capital. Because it is levied specifically upon shares in UK companies, stamp duty also creates a bias towards overseas rather than UK stocks as the latter in effect have a lower rate of return due to the extra cost of purchasing them. This may also encourage the acquisition of UK companies by foreign corporations in order to avoid stamp duty [link 246].

Exemptions and inequity.

The negative impacts of SDLT extends beyond just a narrow view of the housing market. As it is a tax on moving it discourages people from moving house to take advantage of job opportunities, leading to an inefficient distribution of labour and potentially hindering social mobility as much as geographical mobility [link 247]. Additionally, since homeownership is one of the most important sources of wealth accumulation for most people, with net property wealth accounting for 35% of total wealth in the UK [link 248], a tax which makes it more difficult to buy and exchange houses exacerbates wealth inequality. Those who already own property can simply keep a hold of it as it increases in value without incurring any tax liability, while those trying to acquire property or adjust to changes in their life are hit with a significant added burden.

Building companies and property traders who sell homes in a part-exchange deal, purchasing the buyer’s old home at the same time, are typically exempt from paying SDLT on that purchase. This relief is not extended to individuals who swap houses, both of whom must pay SDLT on the purchase of each other’s home [link 249].

An exemption to paying stamp duty on shares is granted to registered intermediaries or “market makers”. Market makers are brokers who commit to buying and selling shares at a publicly quoted prices and are obliged to accept any offer which meets those prices [link 250]. Market makers play a useful role by decreasing the information and access barriers to investing in and trading shares, making it easier for more people to engage with the market, so their access to certain privileges in exchange for the obligations they assume is reasonable [link 251]. However, there is reason to believe that this exemption is being abused by intermediaries applying it to hedging against derivatives and high frequency traders, neither of which are truly market making operations. As a result, about 63% of trade in UK equities is between tax-exempt parties despite the fact that market making operations used to only account for about 20% of turnover [link 252].

Scrap stamp duty.

Stamp duties distort markets, hinder the efficient distribution of resources, act as a drag upon social mobility and reinforce wealth inequality. There are plenty of reasons for people across the political spectrum to support its abolition and indeed many do, from the free-market think tank the Adam Smith Institute and the Daily Telegraph to the Labour mayor Andy Burnham and the socialist journalist Owen Jones [link 253].

The SDLT holiday introduced in July 2020 had an immediate and positive impact on the housing market with a 15% increase in residential property transactions in the following months [link 254]. Of course, the fact that this is a temporary change means its impact is likely to be exaggerated as people rush to complete transactions before the holiday expires, but it nevertheless demonstrates that cutting stamp duty serves to stimulate the market. It is reasonable to expect that abolishing stamp duty altogether would also increase the volume of transactions, just perhaps not quite as dramatically.

The case for scrapping stamp duty does not mean that taxing assets like property and shares is a bad idea in general. But it would be far more efficient and equitable for taxes to target the actual value of assets rather than being imposed upon transactions. For example, an annual tax on the value of property or land could be a fairly lucrative source of revenue which also encourages more efficient use of land without discouraging transactions, producing a better overall distribution of property [link 255]. Likewise, a more effective application of Capital Gains Tax and Corporation Tax, perhaps even an ongoing wealth tax, would be a more efficient way of taxing shareholders than stamp duty.

234 https://www.investopedia.com/terms/s/stampduty.asp

235 https://www.gov.uk/stamp-duty-land-tax

236 https://www.gov.uk/stamp-duty-land-tax/residential-property-rates

237 https://www.gov.uk/stamp-duty-land-tax/nonresidential-and-mixed-rates

238 https://www.gov.uk/tax-buy-shares

239 https://www.investopedia.com/terms/d/deadweightloss.asp

240 0% on the first £125,000, 2% on the next £125,000, and 5% on the final £6,109.

241 As above, except 5% rate applied to the final £239,159.

242 https://landregistry.data.gov.uk/app/ukhpi

243 https://www.lse.ac.uk/business-and-consultancy/consulting/assets/documents/is-stamp-duty-land-tax-suffocating-the-english-housing-market.pdf pg. 10

244 https://citymonitor.ai/economy/here-s-why-philip-hammond-should-abolish-stamp-duty-3446

245 https://publications.parliament.uk/pa/ld201617/ldselect/ldeconaf/20/20.pdf pg. 27