Duty free homes: Reforming property tax for growth and revenue
Britain's Stamp Duty Land Tax (SDLT) is a tax on aspiration. It bungs up the property market and makes it costly to move house. As a result, people stay in the wrong place for longer: workers pay a penalty for moving to new job opportunities, empty-nesters are effectively fined for downsizing, and new parents can't afford homes large enough for their families.
The Problem with Stamp Duty
Stamp duty is costly and unfair. For buyers, it creates a double punishment: when house prices increase, so does the tax bill. On average, SDLT costs a buyer £4,547, which could otherwise go towards a deposit, reducing interest on mortgages, or allow buyers to afford a better house. If life demands several moves in a short number of years, stamp duty is merciless. In short, SDLT exacerbates the housing crisis: adding friction to a market that is already failing British households.
The economist's solution is to replace SDLT with an annual property tax. This removes the distortions and unfairness created by stamp duty, creating instead a more consistent tax revenue stream. However, an annual property tax comes with new problems. Applying such a tax to all current homeowners would be unfair, as many have already paid hefty SDLT bills on their homes.
Our Proposal
The challenge is to find a scheme which is simultaneously efficient, fair, and revenue-positive. This report sets out a scheme which meets these requirements. Our base proposal involves phasing out SDLT and replacing it with an annual progressive property tax (PPT). The PPT would:
- Only apply from the next sale of a property. No current owner will be affected until they buy their next house.
- Provide choice. Anyone buying a home in the next ten years can choose between either paying SDLT or committing to an annual PPT.
- Apply at 0.2% per annum for properties sold for between £125k and £250k, rising progressively up to 1.1% for properties sold for over £5m.
- Completely replace SDLT: once a property has 'transitioned' away from SDLT, it is permanently subject to PPT.
The Impact
Our modelling suggests that an optional proportional property tax, phased in over 10 years, would eventually generate far more revenue for the Exchequer when compared to SDLT. Together with additional measures, it would:
- Raise around £1.7bn above the current SDLT baseline in year one of implementation, rising to around £8bn annually above baseline by 2050.
- Reduce long-term borrowing costs due to forecast future revenue.
- Create more stable and predictable revenue for HMT.
- Increase productivity, GDP and tax revenue resulting from new economic activity.
- Have no effect on the vast majority of homeowners.
- Create substantial savings for buyers, who no longer have to pay SDLT on their purchases.
Read the full article on Centre for British Progress