Stamp duty 'should mirror income tax'
15 March, 2007
Ray Boulger, senior technical manager at John Charcol, commented: “The pre-Budget report disappointingly held out no promise of any moves to make the current stamp duty land tax fair, or even less unfair. However rumours have recently been circulating that this Budget could see an introduction of a 5 per cent top rate for properties of £1 million-plus. If this rumour turns out to be true and is in conjunction with a radical overhaul of the system it could actually turn out to be good news. Unfortunately, whilst Gordon Brown claims he wants to make our tax system fairer, his track record on stamp duty land tax proves the opposite.
“Based on past form all we can expect from our Chancellor is yet another lost opportunity to provide some meaningful help to first-time buyers. One of the government’s manifesto pledges was to increase the number of home owners by one million during this parliament. This was never realistic, but at least it would seem reasonable to expect The Chancellor not to hinder this ambition by perpetuating the imposition of such an unfair property tax, particularly for first-time buyers.
“The most obvious way to reform the system would be to mirror the way income tax works so that the higher percentage rates of tax are only payable on the amounts over certain thresholds. This need not result in a reduction of the total tax raised, providing the rates charged between each band were also increased.”
Current situation:
A buyer wants to purchase a home priced at £250,000. At current rates they would pay 1% in stamp duty land tax for this property, i.e. £2,500. However, if competition for the property pushed the price up to £252,500 they would have to pay £7,575. Thus a 1% increase in the price to £2,500 results in a 203% increase in the tax to £5,075.
Boulger continued: “With average house prices now around £200,000 the lower limit should be set at this level (rather than the paltry £125,000 that it currently stands at) and all the other thresholds should be raised substantially. Nominal increases such as the rise of just £5,000 to £125,000 for the first threshold level in last year’s Budget simply serve to exacerbate the issues facing first-time buyers, as properties are simply re-priced up to the lowest level. The system as it stands is massively flawed and requires a complete overhaul to make it fairer and bring it in line with current property market conditions.”
A NEW WAY TO CALCULATE STAMP DUTY LAND TAX
One suggestion would be for the new tax rates to be 0% on the first £200,000, 5% on the next £800,000 and 6% on anything above £1 million. In this scenario the tax payable on a £500,000 purchase would be exactly the same (£15,000) and on a £1m purchase also exactly the same (£40,000). At all other prices below £1 million the tax would be less than at present and above £1 million, which would include many commercial properties, it would be more.
Boulger continued: “The other property related update to watch out for is the government’s ambition for all new homes to be zero carbon rated within a decade with time limited stamp duty exemption for zero carbon homes. Zero carbon homes are very much in their infancy and the first development of such properties proved that much more work is needed to reach the goal at all, let alone in a cost efficient way. Early indications are that the cost of making a new home carbon neutral are well in excess of the stamp duty saving and so more incentives are likely to be needed to persuade purchasers that paying the extra cost is worthwhile.
“The carrot tends to work better than the stick, although sometimes a combination is needed. Offering a sizable reduction in Council Tax for at least five years on carbon neutral homes would be the right type of incentive to encourage people to spend the extra necessary to buy a carbon neutral home. But the first priority is for the house building industry to iron out any teething problems with the new environmentally friendly systems.”
