Reforming residential Stamp Duty Land Tax

The UK's system of residential Stamp Duty is no longer fit for purpose, says the Royal Institution of Chartered Surveyors (RICS).

In a world of static or falling prices the current slab system presents a major barrier to purchasing property. With housing transactions down 40% in one year, there are significant knock-on impacts to house building and the wider economy. RICS believes that SDLT should be reformed to lower the tax hurdle for first time buyers and those moving home. A two tier marginal system could significantly help increase transactions and help Government to fulfil its objectives for the housing market.

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Residential SDLT should be fundamentally reformed from the slab rate system to a two tier marginal rate system.

RICS proposes that no homebuyer should pay SDLT on the first £150k of their new home. The additional value between £150k and £250k should attract a marginal rate of 2.5%. The value over £250k should be taxed at 5%.

These proposals would cut stamp duty significantly for all those purchasing homes under £1million - 99% of homebuyers. RICS predicts this would cost Government a maximum of 24% of its SDLT revenue in 2008/9.

The thresholds for SDLT rates should then be annually indexed, reflecting house price growth and inflation.

Large investors in private rental should pay on the basis of the average value of each property rather than the lump sum.

Government should also consider offsetting SDLT for first time buyers and senior home owners who wish to downsize.

RICS believes that these changes would see a significant increase in the number of transactions. In turn, through additional SDLT payments, this would reduce the revenue cost to Government of reform.

Current System and the Rationale for Reform

The 40% drop in home buying transactions requires urgent attention from Government. House buying and selling supports significant economic activity from removals to the DIY industry. The stagnant market is also impacting on house building levels, making it more difficult by the month for Government to address long term shortages. RICS believes that taking the opportunity to reform SDLT now, cutting bills for key groups, will help increase the number of transactions even when prices are flat or falling.

Stamp duty is currently charged at 1% of the full sale price of properties worth between £125k and £250k, rising to 3% on the full cost of homes between £250k and £500k. 4% is charged on homes worth more than £500k. This "slab system" distorts the property market and impacts on both buyers and sellers. For first time buyers, it creates another hurdle on-top of the deposit[1]. Around the thresholds, the relationship between price and quality of the property is undermined. For example, a buyer of a £249,999 property cannot pay less than £7,500 more for a slightly better property as higher SDLT kicks-in. If they purchase under the threshold, they have to wait until prices go up significantly before being able to sell-on the home at greater value. They may not recover the fair value of improvements to the property. Another negative outcome is a large incentive to avoid tax through high values for fixtures and fittings. The current SDLT regime is unfair, inefficient and long overdue for reform.

The combination of flat/falling house prices and record numbers paying higher duty makes reform even more necessary. For example, a young couple moving from their first £200k flat to a £300k family home currently pay £9k tax to Government. This was not such an issue when they saw significant annual growth in the value of their first home but now will be a key consideration.

RICS Proposals

RICS believes that Government should lower barriers arising from SDLT for those moving onto and up the housing market This has increasingly been an issue as prices rose and Government received a stamp duty revenue bonanza. But in a world of static or falling prices, these barriers further drive down transactions with a knock-on impact on the economy.

A two tier marginal rate system for residential stamp duty would be fairer and correct the distortions of the current system whilst increasing accessibility and fluidity throughout the market. Unlike a single marginal rate, RICS proposals allow Government to protect revenues whilst ensuring the vast majority of buyers could benefit.

Further Detail on Recommendations

Separate the systems for residential and commercial stamp duty
The impact of residential and commercial stamp duty on individuals and the economy are very different. A clear separation is required to address the pressing needs of the residential property market (defined by Section 116 of the Finance Act 2003). RICS is not currently advocating any change to commercial stamp duty.

Two tier marginal rate (incremental) system

A single marginal rate of SDLT would deal with the distortions of a slab tax but a two tier marginal rate helps Government target benefits to key groups. For example, RICS has calculated that a charge of 2.5% on properties between the values of £150 - £250K, then a 5% rate on the additional value above £250K would benefit all purchases under £1million. Approximately 99% of buyers would pay lower SDLT. RICS projects that this would cost Government 24% of its SDLT revenue in 2008/9 taking into account the current state of the market.

Annual indexation of thresholds

Thresholds need to move annually with prices to ensure the system remains fair. RICS proposes an indexation with the average of house price growth and inflation, in-line with future inheritance tax thresholds increases (announced in PBR 07).

Stamp duty for institutional investors in private rental
It is wrong that an institutional investor in private rental properties will pay SDLT on the bulk price when individual buy-to-let investors will pay a lower rate. This disadvantages tenants who might enjoy higher standards of management and reduces investment in housing. SDLT should be calculated on average individual unit price.

First time buyers

A two tier marginal rate would allow Government to assist first time buyers. However, SDLT also places an extra burden on first-time-buyers over second home owners: the former have to save or turn to their families to pay the tax, the latter can use the capital growth in an existing home for upfront costs. With rapid house price rises, 60% of first time buyers are now paying SDLT. RICS believes Government should consider removing or refunding SDLT for first time buyers for the long term or providing a grant to offset the tax cost. RICS estimates permanently removing SDLT, for this group, for purchases under £250k, would cost £400m on 2006-7 figures.

Older home owners

Government should consider removing or refunding stamp duty for older home owners who are considering downsizing. It should ask whether it wants to tax those who are asset rich and income poor and wish to put their finances on a more sustainable footing. Stamp duty disincentivises moving to a smaller home over equity loans. It also takes many years to make back the SDLT bill in lower energy and council tax costs. Such a measure could form part of a package to provide better housing choices for older citizens and positively tackle under-occupancy.

Administrative process

The current SDLT form requests a large amount of information to tackle avoidance. A simpler marginal system would reduce this problem, freeing-up HMRC to tailor the SDLT system to key groups.