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The stamp duty reform that got away

Ahead of the Budget last week, the Financial Times reported George Osborne was considering a new stamp duty band of 2 per cent on homes worth between £250,000 and £300,000 due to concerns about the sharp jump from 1 per cent to 3 per cent at £250,000 leading to many homes being under-priced.

Many in the industry called for stamp duty reform against a backdrop of average house prices rising 9 per cent, according to Nationwide, with more homebuyers left with a higher tax burden as a result of fiscal drag.

As it happened, the Chancellor chose not to reform stamp duty, at least not for residential properties. He decided instead to impose a 15 per cent levy on companies buying properties worth over £500,000. The new tax came into effect on 20 March and does not apply to properties rented to tenants.

But had Osborne gone ahead with the 2 per cent band, what effect, if any, would this have had on the housing market?

Your Mortgage Decisions director Dominik Lipnicki says: “It would have made a big difference because at the moment we have this massive jump between £125,000 and £250,000. People are pricing their properties above the current threshold and expecting offers below that point largely because of the stamp duty implications and that cannot be right.

“If the Chancellor had implemented a 2 per cent band at £250,000, I am certain we would have seen a smoothing out of the market. Prices are bunching up around certain thresholds and this policy could have seen those creases ironed out.

“This would have made absolute sense and it would fit right in. The way it is at the moment is completely ludicrous.”

Start Financial Services manager Tom Cleary agrees the new band would have helped boost sales in a price bracket that has seen declining transaction levels in recent years.

Cleary says: “If you check figures from the Land Registry, the lowest level of transactions in the property market is between £250,000 and £300,000. Putting in a 2 per cent band stamp duty band in that bracket would go a long way to smoothing that out.

“That kind of gap in sales levels must be due to the tax applied to homes in this particular bracket and, without a doubt, I think the sensible option would be to reduce the tax burden for those properties. The evidence is there that we need something like this. 

“It would lead to more people marketing their property in that price bracket, which would ease up the problem with stock and would potentially help with price issues as well, with a lot more properties in that value range becoming freed up to buyers who do not want to pay 3 per cent tax.”

But Savills residential research director Lucian Cook argues implementing the new tax band would do little to resolve the issues created by the current system.

He says: “This would have a marginal effect at best. It is a 1 per cent saving and on average over the past five years it would have affected about 50,000 transactions. It may potentially have helped to increase sales levels  in that band but that would be offset by other shifts. To sort out the distortions the current system creates in the market, you need a far more fundamental change.”

Cook also points out the revenue generated by stamp duty would be too big a loss for Osborne to allow.

He says: “Something like £4.6bn is earned from residential stamp duty. With the economy in its current state, I do not think Osborne would consider foregoing that. Also, if this 2 per cent band did nothing more than fuel rising house prices, he would simply have been accused of trying to ramp up the market and I think he is sensitive to that in the run-up to the election.”

John Charcol senior technical manager Ray Boulger says: “In all honesty, this policy would not have done much good. Introducing a tax band that covers a £50,000 bracket just would not have made any sense. All that would have done is bring the dead zone for asking prices that is now between £250,000 and £270,000 down slightly but all that does then is create another dead zone at £300,000.

“What is the point of solving one problem, simply to create another? If the 3 per cent rate was changed to 2 per cent between £250,000 and £500,000, that would have certainly made a difference. However, we then face the problem of a jump between a 2 per cent rate and 4 per cent above £500,000.”

Boulger argues such a move by the Government would just be for a PR stunt.

He says: “It is a complete no-brainer; the entire system needs a review to make it a lot fairer and more reflective for the modern property market. A 2 per cent rate between £250,000 and £300,000 would have had very little effect indeed.”

Cook agrees, saying a 2 per cent band would have been more a case of political grandstanding and nothing more.

He says: “There is a massive case, as we all know, for a complete reform of stamp duty so bringing in this new tax band would have just been a bit of a show.”

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