Reducing the amount of stamp duty tax applied to older home buyers could alleviate the pressure on the UK housing market and free up much-needed housing stock.
A report published by the London School of Economics (LSE) suggests that lowering or eliminating the stamp duty land tax for pensioners who are looking to move into smaller properties would help rebalance the housing market.
Its study found that many retirees say they are keen to downsize, but choose not to do so because of the taxes applied to house purchases.
Stamp duty is applied to all purchases over £125,001 in England, Northern Ireland and Wales, starting at a marginal tax rate of 2% and rising to 12% for properties worth £1,500,001 or more.
This means the purchase of a £300,000 property would incur a £5,000 tax bill, something which may be deterring older homeowners from moving.
|Property price||Stamp duty rate (England, Northern Ireland and Wales)|
|Up to £125,000||Zero|
|The next £125,000 (the portion from £125,001 to £250,000)||2%|
|The next £675,000 (the portion from £250,001 to £925,000)||5%|
|The next £575,000 (the portion from £925,001 to £1.5 million)||10%|
|The remaining amount (the portion above £1.5 million)||12%|
While properties in Wales are currently charged these rates, stamp duty will be replaced with a land transaction tax from 1 April 2018. Properties in Scotland are subject to a land and buildings transaction tax instead.
‘We need older people to downsize’
Christine Whitehead, professor emeritus in housing economics at the LSE, says the cost of downsizing is a big problem in London and the South East where property prices – and therefore tax bills – are much higher.
“Stamp duty is inefficient, it makes a massive disincentive for certain types of household to move,” she argues. “That reduces flexibility in the housing market and reduces the investment in the housing market.
“If I have five bedrooms, three bathrooms and two people I’m going to stay there until I die, unless something terrible happens. That is true for a very large number of people in London and the South East.”
Professor Whitehead adds that older homeowners typically performed less maintenance on their property than those of working age, meaning the quality of UK housing stock is deteriorating over time.
However, even with reform of stamp duty, the report did acknowledge that many older homeowners are reluctant to downsize because they have a sentimental attachment to the family home.
A more radical proposal considered by the report involves eliminating stamp duty altogether, and introducing higher council tax payments and new bands to cover the lost tax revenue.
Mark Bogard, chief executive of Family Building Society - which funded the report, described the UK’s housing market as a “shambles”.
“Stamp duty is taxing downsizing, it’s taxing people who need an extra bedroom because they’ve had a child, it’s taxing people who want to move for a job,” he says.
“We need older people to downsize to help the next generation.”
Despite these proposals targeting older homeowners, Mr Bogard says he expects the Chancellor Philip Hammond to persevere with his often-criticised first-time buyer and housebuilding schemes.
Any further announcements are expected to be made when Chancellor Philip Hammond delivers his next Budget statement on Wednesday 22 November.