Reforming stamp duty: what are the options?

Published by Liam Tarry on 07 August 2008.
Last updated on 23 August 2011

Chancellor Alistair Darling is believed to be looking at a number of measures to restore confidence in the UK’s stalling property market, including reforming the payment of stamp duty.

The chancellor is thought to be planning the reforms in order to give some much-needed breathing space to those who are unable to even contemplate purchasing a property as the costs of living continue to spiral.

Options include a stamp duty holiday for all buyers, scrapping the tax for first time buyers or allowing purchasers to defer the payment of stamp duty. The idea of tax-free savings accounts for first-time buyers has also been mooted.

Details of the chancellor’s plans will be presented to Gordon Brown at the end of August, and is believed to be the centrepiece of the government’s new economic plan to be unveiled next month.

Impose a stamp duty holiday

Temporarily suspending the payment of stamp duty until the economic hard times are over is believed to be the most favoured option by Alistair Darling, as it would bring more people into the housing market and lift the economy.

Ian Fletcher, residential director at the British Property Foundation would also welcome a holiday, but believes a more fundamental review of the tax is needed.

“While any temporary cut will be welcome in the short-term if it helps kick start some activity in our housing market, the government needs to think more strategically about reforming stamp duty so that it better supports people moving and encourages institutions to invest in housing supply. We need measures to boost rental and to help shape quality housing that is truly affordable.”

However, Steve Turner spokesperson of the Home Builders Federation believes that should the government choose a stamp duty holiday, they need to act fast. “While a stamp duty holiday would be welcome we need to see urgent and decisive action,” he says. “No-one will take the plunge to buy now if the prospect of not having to pay stamp duty is just around the corner, and this would be even more detrimental to the housing market.”

Deferring the payment of stamp duty

Alternatively, the government may choose to adopt a buy-now-pay-later scheme on the property tax, deferring the payment of stamp duty for a set period.

“The idea that stamp duty will be paid at some point will be something quite attractive to the government,” says Mark Wallace, a campaigns director at the Taxpayers’ Alliance. “It would show that the government is listening to the concerns of ordinary people struggling to cope with ever-increasing food and fuel bills and would restore some financial confidence in the economy.”

David Stubbs, a senior economist at the Royal Institution of Chartered Surveyors (RICS) believes that deferring stamp duty would be unfeasible. “The fact is we are in an economy skirting with recession, unemployment is rising and the price of living is rising by the day,” he says. “Who is to say that borrowers who can’t afford stamp duty now will be better off next year?”

Scrapping stamp duty for first-time buyers

It’s highly unlikely that the government would seriously consider scrapping the tax. “If the government did decide to abolish stamp duty altogether it would be an extremely popular move,” says Wallace. “However this is extremely doubtful as it would deprive the Treasury of billions of pounds in lost revenue.”  According to Treasury’s figures, stamp duty has earned the government coffers around £31.5 billion over the past 10 years.

But, scrapping the tax just for first-time buyers could be a more feasible option.
With the Council of Mortgage Lenders estimating that the average first-time buyer pays around £130,000 for a property, the majority of new buyers have to find around £1,300 just to get on the ladder. The Taxpayers’ Alliance claims that first-time buyers in London are hit even harder - paying around £7,500 in stamp duty.

“Although scrapping stamp duty for first-time buyers would help there is also the issue of what exactly constitutes a first-time buyer,” says Andrew Hagger, spokesperson for Moneynet. “Is it someone who has never bought before, or someone who has come off the market and wants to buy again? The government needs to be extremely careful because whatever scheme it introduces people will always try to find a loophole and derive a benefit.”

Another result of falling property prices could bring more properties out of the stamp duty threshold of £125,000. However, it’s the limited availability of a high loan to value mortgages that will remain the most significant hurdle for first-time buyers.

Introduce a tax-free savings accounts for first-time buyers

The final plan being considered by the government is likely to be the introduction of a new tax-free savings account, based on the existing individual savings account model.

However Hagger is also sceptical about introducing a ‘new’ ISA. “The problem with this suggestion is that it would have to differ from the current ISA set-up,” he says. “Either it would have to offer a substantial interest rate or the government would have to match the savings made. It’s unlikely to be a scheme that the government could rush in at short notice and there is bound to be some complexities as to how it could work. Furthermore you would have to prove you are saving up for a home too, else it could be abused.”

Steve Turner agrees, and argues that saving for a deposit is worthless if turmoil in the mortgage market continues. “Saving £10,000 to get on the ladder won’t make a blind bit of difference if consumers can’t even get a mortgage,” he says. “We need confidence to return to the market urgently to tempt new buyers into the market.”

Whatever the government decides, Mark Wallace believes urgent action is needed. “The government can’t hedge their bets and not follow through what they’ve started,” says Wallace. “After the u-turn on home information packs, the 10p tax rate and proposed fuel duty hike this autumn we’ve almost come to accept that the government will change its mind. Gordon Brown and Alistair Darling need to acknowledge the financial pain many families are suffering and do something meaningful about it.”

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