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

wozearly

JimmyTheWig wrote: »

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?

I wondered something similar, so I figured it would be interesting to put together some estimates using actual data from the Land Registry from December 2011 to see what would happen.

The results are available here

Its by no means an accurate modelling tool, but its the first stab at trying to put something vaguely scientific into the discussion that can help estimate / evaluate proposals based on how many properties fall into various price bands.

In a nutshell, there are three tabs. A summary of the proposal (key findings are below), the workings and assumptions used to loosely break down sales into £10k bands up to £1m and then £100,000 bands up to £4m, and a tab which shows the effect of the proposal on each £10k band.

JimmyTheWig - as you proposed the idea first on this thread, I've credited it to you throughout the document.


In summary, although the proposal is an elegantly simple solution, its unfortunately almost certainly politically unworkable. I've tried to summarise this below with both its strengths and the likely points that would be swiftly picked up on and 'spun' by opponents:

Revenue Neutral Test: 6% increase in total tax revenue

Strengths of the proposal:

1. The steady rise in Stamp Duty is incredibly smooth, completely removing the 'cliff edge' feature of the current system

2. At an overall level, it mimics the revenue intake from the current system very closely on properties over £500,000

Political challenges to implementation:

1. £6.8m tax increase on properties currently in zero tax band

2. Significant tax increase on homes currently in 1% tax bracket - these form the majority of the increased tax revenue

3. Devils in the details: For example, a massive hit on properties sold at at £230,000 - £250,000, where stamp duty goes up by 40%-50% from current levels

4. Devils in the details: A boost to properties sold at £2,500,000, where stamp duty falls by 14%

5. Likely to be spun as a tax increase on poorer homes to benefit middle class voters by opponents to the change


It may be possible to resolve some of the specific problems listed above by tweaking the percentages, but I haven't had the time to investigate this further tonight. I hope to plug in some other suggestions made here and try a few things out myself over the next few days.

In the meantime, the spreadsheet contains the calculations, information and assumptions for those who might be interested in using this to test their own ideas directly.

Eco_Miser

aggrieved wrote: »

Surely an annual stepped percentage tax on property ownership based on a standard valuation would bring in a more predictable and less avoidable revenue than stamp duty on the transfer of a property.

Sounds like council tax to me. The fun part is the valuation, of every house in the country, on the same day. Martin is still urging getting Council Tax banding errors from 1991 fixed.

JimmyTheWig

wozearly wrote: »

I wondered something similar, so I figured it would be interesting to put together some estimates using actual data from the Land Registry from December 2011 to see what would happen.

The results are available here

Thanks for doing this - and thanks for crediting me in it, too!

3. Devils in the details: For example, a massive hit on properties sold at at £230,000 - £250,000, where stamp duty goes up by 40%-50% from current levels

I believe it will be impossible to have a (reasonably) revenue neutral change that scraps the jumps in tax without causing this effect.
Somehow we need to make the tax on £250,000 similar to the tax on £250,001. That's got to be done by pushing the tax on the first up and the tax on the second down.

If we're not prepared to do that then we need to forget the whole thing.

razam

Haven't thought this through completley so may need (a lot of?) tweaking....

I definately agree with marginalising the tax, making it payable only on the amount above the threashold (just like income tax). Currently there is a disproportianate amount of Stamp Duty being paid, with the South East paying more than the rest of the country. This is due to property prices being higher - yes wages are higher, but so is cost of living and your average guy on the street does not get banker bonuses. So by splitting the country into various areas, each area can have the threshold adjusted so that aproximately the same number of properties are taxed in each band in each area (hope that made sense.) Lastly, I don't think there should be a 0% lowest band, but the lowest band should be 0.5% (except for 1st time buyers). Hopefully these 3 steps in combination, should allow the change to be tax neuatral

so in short:

1) Marginalise the tax, so it works the same as income tax.

2) Create 5 Area throughout the UK (Scotland, Wales & N.Ireland, North England, Middle England, South England). With an equal distribution on properties within each band.

3) Up the lowest rate from 0% to 0.5% (except for 1st time buyers).

mh8748

This is a rather difficult one, without lots of data on house price sales and the revenue generated from stamp duty. However, how about a few off-the-wall ideas?

- tax mortgage payments at 1% - this will create a smoother tax income

- introduce capital gains tax on to ALL property sales

- tax the deposit on the property to incentivise first time buyers. This has the added benefit of higher LTVs

- just a fun one: tax the difference between the asking price and the selling price at 10%, with the tax liability being covered by estate agents

One-Eye

1) This would just smooth out those cliff edges thus removing any incentive to lower prices to save tax. It is almost certainly revenue neutral, and produces very few "winners and losers". Note that at the points where the bands change the 'lower' and 'higher' calculations produce the same result (except at £122,000 - This is deliberate to avoid collecting a trivial amount of tax)

Upto £122,000 = 0%
£122,000 - £135,000 = 9% less £10,800 (eg. £125,000 = 11250-10800 = £450)
£135,000 - £230,000 = 1%
£230,000 - £270,000 = 14.5% less £31,050 (eg. £250,000 = 36250-31050 = £5,200)
£270,000 - £480,000 = 3%
£480,000 - £530,000 = 13.6% less £50,880
£530,000 - £960,000 = 4%
£960,000 - £1,060,000 = 14.6% less £101,760
£1,060,000 - £1.8m = 5%
£1.8m - £2.2m = 16.0% less £399,000
Over £2.2m = 7%

2) Complete Smoothing, but maybe not totally revenue neutral as I expect sales volumes would be higher at the lower end of each band. If the sales volumes are known then it would not be difficult to adjust the bands to suit. It does produce a lot more "winners and losers" than the method above. Note that at the points where the bands change the 'lower' and 'higher' calculations produce the same result (except at £125,000 - This is deliberate to avoid collecting a trivial amount of tax)

Upto £125,000 = 0%
£125,000 - £180,000 = 3% less £3600
£180,000 - £740,000 = 5% less £7200
£740,000 – £1.5m = 6% less £14600
£1.5m – £2.24m = 11% less £89600
Over £2.24m = 7%

hermante

N1AK wrote: »

For example, if I was a rich man who already owned a £4m property in London why pay 5% to sell it. I'll either find a way to avoid the £100,000 tax entirely or rent it instead.

If you are a rich man who owns a £4m property in London, £100K is peanuts to you and you don't care. You need to consider WHY the rich man is owning that property - probably because he considers London as a safe haven for his cash (incidentally, this is why the property is worth so much in the first place). If he needs to sell to access the money, then he isn't rich.

galacticwarlord wrote: »

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).

Why cap at 10% or 10M? Let's have 100% stamp duty on a ten million pound house (and watch as houses suddenly become more affordable for everyone).

oldvicar wrote: »

Scrap SDLT altogether, and replace it with an annual tax of e.g. 0.2% of the price the property was last bought/sold for. Have it collected locally with council tax.

Why not INSTEAD of the council tax.

wozearly

JimmyTheWig wrote: »

I believe it will be impossible to have a (reasonably) revenue neutral change that scraps the jumps in tax without causing this effect. Somehow we need to make the tax on £250,000 similar to the tax on £250,001. That's got to be done by pushing the tax on the first up and the tax on the second down.

I both agree and disagree.

The main political downside is where stamp duty becomes subject to a sudden rise in property bands that are "politically sensitive". Even if its revenue neutral overall, to make it politically viable it would be necessary to protect houses in the lower price brackets from the natural effect of the rise.

One alternative would be to shunt the whole scale along so that the 0% band starts further up than in your original suggestion, but where stamp duty escalates faster (as a hypothetical example, a 0% band up to £150,000 followed by a 2% band would lead to a £250,000 having a new stamp duty of £2,000 rather than the £2,500 it currently has. £250,001 would also have a stamp duty of £2,000, rather than the £7,500 on the current model).

The overall change could be made revenue neutral either by thumping much higher increases on comparatively larger properties, or by not "giving away" too much at the lower ends compared to the current model, or a mix of the two.

I'll be having a play around with what this might look like, as well as trying to model some of the other suggested ideas, over the weekend.

hermante wrote: »

Why cap at 10% or 10M? Let's have 100% stamp duty on a ten million pound house (and watch as houses suddenly become more affordable for everyone).

There aren't many £10,000,000 houses in the UK, so all this would do is act as a cap on properties at £9,999,999 (or whatever figure sits just under the band) and/or discourage their sale. I don't see how this would lead to houses further down the scale becoming more affordable - generally speaking, the housing market is pushed up due to growing demand at the bottom end of the scale (and limited supply) rather than pulled up by rises at the top end.

The best things that could happen for affordability would be construction of more houses at the lower end of the scale designed to sell at or below the market average for that area (which basically means social housing / affordable housing), a reduction in mortgage availability (forcing prices to drop to the level that demand can sustain if sellers want to actually get a sale), or concerted efforts to push house prices overall into decline.

This may arguably be a good thing, but beware the law of unintended consequences. Negative equity issues, a significant drop in the number of first time buyers, a rise in rental costs and discouraging private sector house building would all be likely effects.

Great if you're a landlord, of course.

antrobus

wozearly wrote: »

....

The best things that could happen for affordability would be construction of more houses at the lower end of the scale designed to sell at or below the market average for that area (which basically means social housing / affordable housing),

Yes, that would help.

wozearly wrote: »

.....
a reduction in mortgage availability (forcing prices to drop to the level that demand can sustain if sellers want to actually get a sale), or concerted efforts to push house prices overall into decline...

That doesn't exactly encourage people to build "more houses at the lower end of the scale". Or at any end of the scale for that matter. Who is going to build or even buy a house whose value is guaranteed to fall given these "concerted efforts" being made to push "prices overall into decline"?

wozearly

antrobus wrote: »

That doesn't exactly encourage people to build "more houses at the lower end of the scale". Or at any end of the scale for that matter. Who is going to build or even buy a house whose value is guaranteed to fall given these "concerted efforts" being made to push "prices overall into decline"?

Pretty much what I was getting at.

It wouldn't stop new building - provided that the cost of buying the land and building is comfortably less than the market sale price, its not the end of the world if prices are likely to fall, as although it means that the return for the developer is likely to be lower it doesn't mean its unprofitable. For those buying the house, provided you intend to stay there for the foreseeable future, its not the end of the world if you go into negative equity for the short-term (although that's not something that people can always predict, and few people would actively want to put themselves in that boat).

The group that would be relatively insulated from the effects of house price falls are those building with the intention of keeping the house and renting it out rather than selling it (ie, social housing providers).

Ultimately the market would reach a new equilibrium at a lower price and new buyers would be happy (existing homeowners and sellers much less so). But this would come with a number of costs.

The overall point I was making is that making houses "more affordable" is not a win-win situation. And there are far more potential losers than potential winners amongst the voting population, so we're unlikely to see politicians do anything too radical in this area for the time being.