Stamp Duty – can you fix Britain’s worst tax?

Former_MSE_Paloma

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.

Read Martin's "Stamp Duty – can you fix Britain’s worst tax?" Blog.

Please click 'post reply' to discuss below.

danmck_2

Marginal System;

0-100k - 0%
100 - 250k - 1.5% (so a £250k house is £2,250)
250 - 500k - 4% (so a 500k house is £12,250)
500k - 1m - 7% (so a 1m house is £47,250)
1m -2m - 10% (so a 2m house is £147,250)
2m + 13% (so a 5m house is £537,250)

Winners compared to current system - everyone buying between £125k and £750k (ish)

Losers compared to current system - transactions between 100k and 125k (maximum loss of £1,250), and those spending over £750k (especially the highest transactions).

NB. I've not really checked the maths so could be way out

JimmyTheWig

Would it work, roughly, to take the midpoint of each bracket and fix the amount of stamp duty payable at that point at what it is now. Then draw a straight line between the points?

So the percentages in the bands below would only be applicable for the amounts within that band - like income tax.

Up to £62,500 is free.
From £62,500 to £187,500 it's 1.5% (so a property selling for £62,600 would pay £1.50).
From £187,500 to £375,000 it's 5%.
From £375,000 to £750,000 it's still 5%. [I don't understand this!]
From £750,000 to £1,500,000 it's 6%.
From £1,500,000 upwards it's 9%. [I picked a random celing of £4m to give a £3m average in the current bracket.]

If receiving this tax is costly to process then I don't see why amounts under, say, £20 could be waived.

Azari

The problem with the 'rules' as stated is that to correct a ridiculous 'cliffhanger' tax such as this you must end up with some people paying a lot more if you want the result to be revenue neutral.

JezR

Stamp duty used to be a very simple tax. From the mid 1980s it was charged at 1% over a single threshold, at that time £30k. Prior to this it was never more than 2% since the mid 1950s. It only became complicated in 1997 with the introduction of multiple thresholds and tiers of rates, which has been built on since. I don't need to point out who was responsible for this but he complicated more or less every tax and benefit system we now have.

JimmyTheWig

Yes, Azari, any revenue neutral change is going to see winners and losers.
The aim is to minimise the extent of the winnings and losses and to make it all more fair.

michaels

100% with you on this one Martin

I propose index linked (and adjusted for betterment) CGT payable on PPR but

here is the twist, it is only payable when equity in ppr is reduced, for example on downsizing or death.

The reason this is fair is because housing land is restricted in supply in the UK so the gain resulting from fixed supply and increasing demand should be shared between society as a whole (ie via taxation) rather than being exclusively an individual gain.

SnowMan

0 - 122K at 0%
128K - 238K at 1%
263K - 488K at 3%
513K - 975K at 4%
1,025K - 1,900K at 5%
Above 2100K at 7%

So identical to the existing stamp duty within these ranges.

But then for properties between these bands use a tapered rate

So for example

Property worth 122K stamp duty of 0% (£0)
Property worth 123.5K stamp duty of 0.25% (£308.75)
Property worth 125K stamp duty of 0.5% (£625)
Property worth 126.5k stamp duty of 0.75% (£948.75)
Property worth 128K stamp duty of 1% (£1,280)

Note these aren't extra bands a such but just examples of how the tapered rate would be calculated between (say) the 122K and 128K price levels. So in terms of keeping the explanation simple you would say that if a house sells between 122K and 128K the rate will increase uniformly from 0% to 1% between 122K and 128K.

Note the logic in the width of the bands where tapering applies is that the step jump in duty e.g. when a property is worth £125,000 and then £125.000.01 is recouped gradually at £1 per £5 rise in house price over a price range centred on the existing band limits. The £1 per £5 is arbitrary and a slower or faster tapering rate could be used.

The advantage of this method is that it broadly similar to the existing system but with the step jumps in duty smoothed out.


In terms of fairness and probably simplicity a marginal rate of stamp duty system (like the income tax rate system) might be fairer and simpler but that would involve much bigger winners and losers when comparing with the current system.

Eco_Miser

We now have calculators and computers that can handle extremely complicated functions. So instead of a complicated series of straight lines and steps, have a simple smooth, increasing function.
Something like Tax = Rate * (Price - Floor)^exponent, where Floor is the minimum price on which the tax is charged, and exponent is a number, probably between 1 (linear) and 2 (parabolic) which determines how quickly the effective tax rate increases with Price?

I'd work out some actual numbers, but it's late.

galacticwarlord

The percentage stamp duty you pay should be the house price / £10m. For example: buying a house for £225k, you would pay 2.25% tax; buying a £585k penthouse, you would pay 5.85%.

This would give a smooth curve and be simple to understand. It would need to be capped though, at say 10% (on anything over £1m).

This doesn't meet Martin's objecive of nobody having to pay much more than they do now, but I don't agree with that anyway - the burden on the rich would and should be greater. It would also put a tax burden on those buying the cheapest properties, albeit a small one. I don't disagree with that either.

A bit of a downside is that it's not very inflation-proof. To cope with inflation, you'd need to increase the £10m denominator, which would work, but the numbers wouldn't be as neat and intuitive.

DVardysShadow

JimmyTheWig wrote: »

Yes, Azari, any revenue neutral change is going to see winners and losers.
The aim is to minimise the extent of the winnings and losses and to make it all more fair.

As I see it, the aim is to remove the step changes at £125000 and 250000 which make the market very difficult just above those thresholds.