Stamp Duty: Scrap, Suspend or Defer?

August, 06, 2008

The current mortgage famine and property slump is causing another major headache for the Government. While most of us take our summer breaks, junior ministers, aides and advisors will be burning the midnight oil trying to identify ways to boost the market... without hitting Treasury coffers to hard.

One key area being scrutinised, at last, is Stamp Duty. This tax is currently levied at 1% of property value for houses between £125k to £250k, 3% for £250k - £500k and 4% for properties over £500k. A politically sensitive issue is that it whacks southern English voters (and recent polling figures for Labour show that they need some love). How could stamp duty be changed and is there a plan that can offer struggling buyers a hand and boost the public’s perception of the Government?

SaveBorrowSpend gives you a quick guide to what’s on the table and the possible implications.

Stamp Duty Holiday

A suspension of stamp duty is being considered. Depending on which newspaper you read this could either be introduced for all properties up to £250k or across the board. The holiday would last for a set period of time (mooted to be anywhere between 4 months and a year). 

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Buyers spend thousands on stamp duty so any holiday would seem a welcome reprieve and the National Association of Estate Agents (NAEA), for one, says the idea is “very encouraging”.  (They would say that, wouldn’t they?)

However, this plan has two big ‘buts’

Firstly, any stamp duty holiday would make a substantial dent in the Treasury coffers at a time when the Government can ill afford it. Stamp Duty on residential property raised nearly £6.5 billion in the financial year ending April 2007, of which around £1.4 billion came from the lowest stamp duty band. So it isn’t hard to see how much of an impact a suspension of the tax would have on the treasury coffers.  Also, due to the current stagnation of the property market the Government is already looking at its revenue from stamp duty being halved in the next financial year.

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Secondly, critics say the Government shouldn’t meddle, fearing a stamp duty holiday would boost transactions in the short-term but lead to a sharp fall when it’s over.  Liberal Democrat Treasury Spokesman Vince Cable has called the idea a ‘bribe’ and says the Government should not be in the business of encouraging people to buy houses in a falling market. Would a six month spurt of sales really kick start the current market?

Scrap Stamp Duty for FTBs

TV property gurus Kirsty and Phil, (who I trust more than any politician) have been campaigning for months for stamp duty to be scrapped for first-time buyers. It seems a good plan especially as it would hopefully help FTBs across the country whether they were buying a £80k property in the North or a £180k property in London (which at a squeeze would get you a one bedroom studio in a reasonable location).

However, it all comes back to revenue and is widely thought to be a step too far for the Government in the current climate. The Conservatives insist they have “costed” plans to abolish the tax for 90% of FTBs.

Stamp Duty Deferral

Another option for the Government, and perhaps the most attractive and likely, is deferring stamp duty.  Buyers are given more time to pay up and the Government, in the medium-term, doesn’t lose out on the cash.

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But, and there’s always one, this could prove a clumsy process to administer (it sounds like a version of Tax Credits to me – and they’ve not exactly been a stunning success as far as administration goes) and Chief Economist of the Home Builders Federation, John Stewart believes it will have little affect.

Other ideas in the Chancellor’s box of tricks

Families who have been refused a loan from commercial lenders could get a mortgage from the local council (Ok, so lending criteria has been dramatically restricted since the Credit Crunch, but do you feel comfortable with local councils offering mortgages to people who lenders won’t touch?). Presumably, the council is obliged to offer accommodation anyway, so is this a privatisation of that obligation by other means?

Another plan is for Housing Corporations to be allowed to buy more unsold private properties which could then be rented out at affordable rates. This seems quite sensible: vacant housing stock is actually used and everybody gets some kind of deal: tenants (a home at an affordable rent) the vendor (nobody else is buying it) and the council (takes pressure off housing lists).

Don’t meddle

Many experts simply say the property market was over-heated and what we are seeing is a natural readjustment, so just leave it be. Also surely deferrals and holidays would make little difference in a market where one of the key problems is people can’t secure a mortgage in the first place. Is it a case of too little, too late?

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Ah, but (yes, another but) the Government has a cunning plan … it could bail out the lenders. I refer you to something I prepared earlier: Mortgages: Government bailing out or copping out?

If meddling is to be done, a combination of plans could just work. Governments always love talking about a “package of measures” so expect to see a mixture of all these ideas presented in the latest New Labour re-launch. Except that this issue, property, is one of the hottest topics of all and only tangible success will do...

   SaveBorrowSpend                      Philippa Adam