Is SDLT helping or interfering with the housing market? Updated economic analysis of policy impact

The Problem

Stamp Duty Land Tax (SDLT) has become an increasingly important source of revenue for the Treasury – with £9,275m raised from 1.1 m residential transactions in 2017/18. Yet many commentators regard stamp duty as a poor tax reducing transactions and interfering with the workings of both the housing market and the labour market. The latest such statement is in last month’s IMF annual report of the health of the UK economy, where Christine Lagarde  states clearly that rebalancing property taxation away from transactions (i.e., SDLT and capital gains tax) toward values would both boost labour force mobility and encourage more efficient use of the housing stock.

The Government’s Approach

Over the last few years the Chancellor has made a number of modifications to stamp duty land tax. The first and most fundamental change was in 2014 when the structure was shifted away from ‘slab to slice’ at the same time making it more progressive so that everyone except those buying a home for more than £937,000 would pay less than under the earlier system. When launching the initiative, the Chancellor George Osborne stated it aimed to reform ‘a badly designed tax on aspiration’.

The second big change was from April 2016 when the Chancellor imposed a 3% surcharge on ‘additional’ properties (dwellings where the purchaser already owns one home) with the stated objective of shifting the market much more towards owner-occupiers and away from what was described as a risky Buy to Let market.

The third initiative introduced at the end of 2017 gave relief from SDLT to first time buyers buying properties priced at below £300,000 were exempted and those buying between £300,000 and £500,000 pay lower rates. 

Finally, just before the Conservative Party Conference the Prime Minister announced that the government would consult on introducing a further 1% stamp duty land tax, possibly rising to 3%, on purchases by overseas buyers who do not pay tax in the UK – arguing that they increased house prices and it ‘cannot be right’ that non-residents and foreign companies can buy properties as easily as British residents.

Positive impacts – meeting stated objectives?

While all of these changes were introduced with clear political rationales, and at least the first has some efficiency benefits, it would not be over-cynical to argue that, in the main, the impacts have been on Treasury revenues and on continuing low levels of transactions among existing owner-occupiers.

First, while it was indeed the case that on day one of the 2014 reforms the vast majority of purchasers paid less tax, this effect has been eroded by house price rises which mean that an increasing element of the purchase price may incur a higher rate of tax. So, the ‘tax on aspiration’ is slowly being re-introduced.

Secondly, the introduction of first time buyer relief has also decreased revenues. Over the first seven months it has been in operation it has cost the Exchequer £284m to assist 121,500 first-time buyer households. The number of first time buyer transactions has undoubtedly increased, with purchasers obtaining first time buyer relief accounted for some 20% of all residential transactions during the first half of 2018. But how much of this increase is the result of the policy is much more difficult to show.  The average benefit per purchaser is only £2,300 – rising to £4,300 in London.

Thirdly, the ‘additional’ dwellings surcharge has been a very significant revenue raiser. But there is very little evidence that it has reduced transactions and freed up properties for owner-occupiers. Indeed, in 2017/18 these transactions were nearly 20% above those in 2016/17 (in part, but only in part, because some transactions were shifted earlier after the announcement of the surcharge). Over the same period receipts from ‘additional’ transactions accounted for 44% of total SDLT revenue, bringing in £4,060m with almost half of that coming from the 3% surcharge. In the latest statistics, which cover the second quarter of 2018 ‘additional’ homes receipts have fallen by 9% as compared to the second quarter 2017- but this compares with a 15% fall in residential receipts overall, implying that the decline in activity and tax has been concentrated among existing owner-occupiers. Adding a further 1% – 3% surcharge from overseas buyers is thought to be likely to increase the take by only between £40m and £120m a year – i.e., by less than 1% (reflecting how unimportant the issue actually is).

Negative impacts on the housing market

The evidence on the low rates of movement among existing owners is clear. Transactions by owner-occupiers as a proportion of the total have been declining while first time buyer transactions have increased. Moreover, this is a long-established trend. Data from UK Finance (which only covers transactions that involve a mortgage) show for instance that hat the numbers of existing owner occupiers moving are now little more than half the levels observed ten years ago.

Moreover, SDLT is fundamentally a tax on London (accounting for 39% of SDLT revenues in England in 2017/18). This makes the tax politically more acceptable – not many outside the capital minds London being taxed – but it does mean these inefficiencies are particularly important to the health of the overall economy.

SDLT is by no means the only reason for this decline in mobility, but it goes some way to explaining why people who want and need to move are deciding not to do so. Indeed, in the survey carried out for the Family Building Society late last year SDLT was given as the second most important barrier to moving mentioned affecting some 40% of respondents including a large proportion of people looking to downsize. The resultant ‘silting up’ of the market worsens the match between households and their homes. Fewer homes on the market puts pressure on house prices. Lower levels of housing transactions have knock-on effects on the wider economy because house moves are associated with significant levels of expenditure that contributes to GDP and indirectly to government tax revenue. SDLT reduces labour mobility and thus productivity, particularly as it reduces the incentive to take a new job that require moving house.

We cannot afford to have so many people living in homes that do not meet either their housing needs and their financial circumstances, at the same time as younger households are forced to live in unaffordable overcrowded accommodation. Restructuring property taxation to increase the incentive to move must be a priority.

For a more detailed discussion see A tax too far? Monitoring the impact of SDLT. A report for Family Building Society by Christine Whitehead, Kath Scanlon & Fanny Blanc published in July 2018.

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