The Government has announced it will be reforming Stamp Duty in the next finance bill due in 2003. Disappointingly, the recent Budget only removed the tax on commercial holdings in deprived areas, bringing it in line with policy on residential properties.
The present system is a major concern for the residential mortgage industry. According to the Council of Mortgage Lenders (CML), if house prices continue to rise, 66% of first-time buyers will find themselves liable for the tax by the next Budget ‘ around one million homes would be over the current £60,000 threshold.
The proportion of homes priced over £60,000 has increased greatly in the last four years. The average first-time buyer in the West Midlands, East Anglia, South West, South East, Greater London and Northern Ireland is now likely to hit the threshold for Stamp Duty, compared to 1992 when only London was typically affected. The effect this has had on Government revenue has been spectacular. Residential Stamp Duty was worth £2.2bn in 2000/2001, compared to £675m in 1996/1997.
The CML’s main concern is that the tax is levied in a slab structure. Taxing the entire price of a property is seen as unfair, if only a small proportion of the total value exceeds the threshold.
Michelle Vosper, press and parliamentary officer of the CML, said: ‘We would want a more graduated structure on Stamp Duty, rather than paying the rate on the total price. We would also like to see tax paid on only the proportion that goes over the band.
‘The current system distorts the market and encourages tax avoidance. The whole system is out-dated and needs looking at ‘ which the Government has agreed to do. Obviously we will be working closely with them once the review takes place.’
The concern has not only been the threshold for the tax but the rate it is levied at. For a four-bedroom family home in Clapham, South London worth £600,000, Stamp Duty amounts to £24,000 ‘ more than an average worker earns in a year. The rise in Stamp Duty has, until now, been justified on the grounds that it would help to dampen the upper end of a booming property market without affecting hard-pushed first-time buyers at the lower end. However, it seems the tax has simply added to the considerable costs of moving home, without doing anything to steady prices.
F&C Management Ltd (formerly Foreign & Colonial) welcomed the abolition of Stamp Duty on commercial property in deprived areas, and foresees an increase in urban regeneration business. However, it believes the level of duty levied elsewhere is unfair.
Tim Bell, director-property at F&C, said: ‘F&C believes the current level of Stamp Duty at 4% is discriminatory when compared to the 0.5% Stamp Duty levy that applies to equities. The property market requires liquidity to enable it to operate efficiently. The current high level of duty discourages liquidity and is inconsistent with the Chancellor’s declared aim of increasing productivity, investment and enterprise.’
He added he did not see the taxation level falling significantly due to the revenue, but that the method may change, getting rid of the thresholds and taxing at a flat rate, for example.
Skipton Building Society was no more hopeful that the burden of taxation would reduce.
Colin Dale, head of lending at Skipton, said: ‘The Treasury has announced the Government is committed to the reform of Stamp Duty in 2003, but few in the industry expect much change. It is an easy tax to collect and, seeing as the revenue gain since 1997 is so enormous, it simply cannot be replaced by something else. Any modifications to the tax will probably be more to do with its collection, administration and combating avoidance, as opposed to structural changes. Overall, we do not envisage it getting any easier for the homebuyer.’
Meanwhile Alex Bannister, chief economist at Nationwide Building Society, said instead of reducing Stamp Duty, the Government is more likely to consider means of preventing tax avoidance: ‘My feeling is they will look at ways that people are currently avoiding the tax, closing the loopholes. They may go for a system like Income Tax, where there is a tax-free allowance with tax paid on any amount over that in a graded scale. Presumably the top end would pay more and the bottom less, which would be consistent with the Government’s other policies.’
But he added the Government would have to be careful about how high they make the upper band. Citing low-tax in US, where people move to where the work is and Europe, where taxes on moving are so high meaning people move infrequently. He said: ‘We are an owner-occupied country and need to be able to move house.’