Imagine a Government scheme that sought to profit from pushing the price of one of life’s essentials higher, that encouraged people to borrow as much as possible, and then used a deliberately unfair system to tax them on it.
It sounds like a pretty daft plan for any society, let alone a heavily indebted once that needs to think seriously about what it spends.
In Britain, we have exactly that sort of bonkers state-backed scheme – it’s called stamp duty.
Stamp duty in itself is not a bad idea, or uniquely British. What we do have, however, is a combination of stratospherically high house prices and a poorly designed stamp duty system that allowed successive governments to line their pockets rather than make it fairer.
But what is urgently needed is an overhaul of a system that is unfair, economically harmful and continues to promote the belief that high house prices are a good thing.
How an unfair tax system was born
If you want to buy a family home in large swathes of the country, the massive house price inflation seen since 1997 means you will have to find at least £250,000.
Thanks to Gordon Brown, you will also need to hand over at least £7,500 to the Government, just for the privilege of buying a home.
During his time as Chancellor, not only did Mr Brown preside over a house price boom that saw property inflation far outstrip growth in wages, he also cashed in on it by introducing new stamp duty thresholds and then hiking the rates imposed at these levels.
Stamp duty is charged on the entire purchase price of a property.
Before Mr Brown’s time in charge of the nation’s finances stamp duty was a flat rate of 1% above £60,000. This was changed to 1.5% above £250,000 in 1997 and 2% above £500,000 and then 3% above £250,000 and 4% above £500,000 in 2000.
The £250,000 limit would now be £675,000
Bar some tinkering – under severe pressure – with the threshold at which stamp duty starts, Mr Brown point blank refused to help out homebuyers and instead dragged more and more into the high stamp duty net.
Astonishingly, had the £250,000 threshold risen in line with house price inflation it would now stand at £675,000, according to Nationwide index figures. The £500,000 threshold would now be at £1.35m.
Homeowners hoping to move had hoped that Mr Brown’s hop upstairs to Prime Minister may bring some respite from stamp duty, but calls on his successor Alistair Darling to do something about the taxes unfair imposition also fell on barren ground.
Meanwhile, the Coalition Government’s arrival in power has not yet brought any hint of help for those homebuyers facing a colossal tax bill to move, at the same time as lenders are demanding bigger deposits and wages are frozen.
A stamp duty break up to £250,000 is not much help
The sop to those campaigning for a change to stamp duty has been two separate tax holidays. The first was a break for all up to £175,000 and the second was a break for first-time buyers up to £250,000.
But realistically it is not the 1% stamp duty band that is the problem. A 1% tax on a property’s purchase cost that is capped at £2,500 is not overly hard on buyers when you consider the cost of property.
What is deeply unfair is hiking that tax from £2,500 to £7,500 for those forced to pay more than £250,000 and at least £20,000 for those unlucky enough to have to pay more than £500,000 for a home.
Note that I say forced and unlucky. That is because despite more than a decade of propaganda to the contrary, high house prices and rapid property inflation are a bad thing.
Nobody wants to have to pay more for a property to live in a fairly basic essential in a property owning society like Britain. They are forced to by the circumstance that means homes where they want to live are expensive.
If you have to pay more than £250,000 for a two-bedroom flat in London, borrowing a small fortune from the bank over 25 years, that is not good news.
If massive house price inflation means that to secure a family home that would have cost a buyer a decade ago £200,000 now costs you £500,000, you are not lucky.
And it’s the biggest seller who wins
One of the arguments put forward for retaining the stamp duty system we have is that you may pay a large amount of tax but the buyer further up the chain pays more.
The counter argument to this, of course, is that while that may be true, any system that imposes a slab-style tax based on the previous owners’ property capital gains seems clearly unfair.
Added to this, at the top of the chain the seller of the largest house who is not buying another one cashes in the biggest house price gain and also pays no tax.
Too high stamp duty is economically unsound
There are two other big problems with stamp duty.
The first is that it is a tax on movement: high transaction costs act as a drag on the number of people who can move to look for work and prevent labour flowing efficiently round the economy.
With credit tight, homebuyers have to raise big deposits of at least 25% to secure the best mortgage, stamp duty adds an extra burden meaning a buyer of a £300,000 home needs to raise £75,000 deposit and then find £9,000 for the tax.
The second problem is than when times are good it encourages even more debt than we already have. When lenders were willing to offer good mortgage rates whatever the deposit, many homebuyers not only borrowed to cover their home’s cost but also borrowed to cover their stamp duty.
So what next for stamp duty?
It is time to completely change the way we impose stamp duty and for the Government to get a grip and do some proper well thinking on it, perhaps presenting a number of options.
Here are a few:
Change stamp duty thresholds in line with property price inflation in future and give at least some allowance for price rises since the extra thresholds were brought in. For example, move the 3% threshold to £500,000.
Impose stamp duty in the same way that income tax is levied. So the rising percentages stay but are only paid above that threshold, with thresholds linked to house price inflation.
Make sellers pay stamp duty, creating a tax on their capital gain. If they make no capital gain, or one so small that the tax would almost wipe it out, no stamp duty or reduced tax is paid. As sellers paid more tax based on higher prices, the incentive to keep them lower would counteract the incentive to add the tax element onto their asking price.
Create regional variations in the stamp duty thresholds, recognising that a £250,000 home is very different in Newcastle to London.
Simply change stamp duty back to a flat 1% on all properties.
These are just a few simple options. (There are more and if you have one I’d love to hear it.)
Of course, there will always be the austerity argument against changing stamp duty the country just doesn’t have the money. However, the time to make a change is when the tax take is low transactions are currently down almost 50% on 2007 and a society should not simply stick with an unfair tax just because it makes money.
It is not beyond the wit and wisdom of our elected leaders and their civil servants to come up with a way to make stamp duty fairer and still pull in revenue.
But then it is also surely not beyond the wit and wisdom of those same leaders to realise quite how unfairly stamp duty is currently imposed, and they haven’t done anything yet.