Meg Saksida sums up recent and proposed changes in stamp duty land tax on residential properties.
Stamp duty is said to be the second most hated tax in Britain; the runner up to the abhorred inheritance tax.
Apart from a gift, or a transfer on divorce, or a transfer as a result of a will or intestacy, stamp duty land tax (SDLT) is payable on every acquisition of property or land in England and yields approximately £1 billion of income monthly from the taxpayer. One only has to go back to 1997 when there was only a single modest stamp duty rate of 1%, which was paid by the minority, to see how much ‘fiscal creep’ has occurred in the intervening years, causing the current hatred of SDLT.
The current situation
To purchase an average priced house in London in August 2019 (‘average’ being £472,753, according to the government’s house price index (www.gov.uk/government/news/uk-house-price-index-for-august-2019)), the purchaser would be required to pay £13,638 in SDLT. As a result of changes stemming from the autumn 2015 budget, if it is a second home costing more than £40,000, 3% more is added to the duty at every level, and the tax payable on the same London property would increase to £24,070.
The maximum amount an individual could pay in SDLT would be the scenario involving the purchase of a second property costing more than £1,500,000, where the rate accelerates to 15%. At the minimum, this would cost £135,000 for a property costing exactly £1,500,000, increasing by £15,000 for every £100,000 added on to the price.
Changes in the timing of payment
Further changes were made in Finance Act 2019, causing the timing of the payment of SDLT due to be significantly reduced.
Historically, purchasers had 30 days in which to pay the SDLT, but from 1 March 2019 this deadline has halved to only 14 days. The 14-day period includes non-working days such as weekends and bank holidays, so care needs be taken, as ‘two weeks’ may end up becoming single figures when considering ‘business’ days.
For example, a property completed on 9 April 2020 would only have eight business days in order to get the SDLT paid to HMRC to meet the 14-day deadline. The penalties for late payment have not changed and a payment even a day late incurs a fixed penalty of £100. If the return is more than three months late, the fixed penalty increases to £200; and interest also accrues from the due date.
Proposed changes
In order to make the tax slightly fairer (and a little less despised), with the joint motives to both encourage activity in the property market and to specifically tempt first time buyers, in the summer of 2019 Boris Johnson pledged to reform SDLT at the next election. A report was produced by the new ‘Centre for Policy Studies’ (CPS) in which SDLT was labelled ‘a tax on mobility and aspiration’ and accused of acting as a barrier to individuals being able to live in the home and area that they want to, as well as having a negative impact on the economy.
The changes proposed in the CPS report were indeed quite radical; the most controversial being the suggestion that the liability for who pays the SDLT should change from the current position where it is the liability of the purchaser to the new suggested position where the burden would shift to the seller of the property. This would automatically make first time buyers completely exempt from SDLT, which Mr Johnson believes would be the helping hand they require to take their first step onto the property ladder, and in turn create a generic new surge of investment putting ‘rocket boosters’ into the UK economy. Although there is already an exemption for first time buyers (introduced from 22 November 2017), this depends on the value of the property being purchased. No SDLT is charged on a purchase of a property up to £300,000, and if the residence costs up to £500,000, only 5% between £300,000 and £500,000 is levied.
Mr Johnson’s suggested change, however, has not been welcomed by everyone. Sajid Javid, the Chancellor of the Exchequer at the time of writing, has indicated that a change in the liability of who pays SDLT is not something that he is intent on pursuing, so an agreement between the two of them (or any subsequent Prime Minister and Chancellor) will be required before any of the proposed amendments are confirmed. Further, the Business Secretary of State at the time of writing, Andrea Leadsom, refused to confirm any of the proposed changes by simply stating ‘significant changes’ already made by ministers had helped first time buyers.
Another significant change proposed in Mr Johnson’s report is to increase the lower threshold for SDLT, where no tax is due, from the current £125,000 to £500,000. This would mean that no SDLT at all would be paid on a property sold for under £500,000, which would cut all but the highest value properties out of SDLT completely. Savills estate agents estimate that in 2018/19 around 300,000 property sales would have been exempt. With the average national price of a house at £251,233 (as of August 2019; see www.gov.uk/government/news/uk-house-price-index-for-august-2019), purchases of most English houses would, therefore, not incur any SDLT.
Finally, Boris Johnson suggested that he would cut the highest rate of SDLT from 12% to 7%. The precise details of the suggestion in the report are that the rate would be 4% for properties over £500,000, increasing to 5% for those homes costing over £1 million. Applying this to the average priced London property purchase above, the savings would be the entire amount of the SDLT, as the average price is under £500,000.
Financing the proposed changes
Another suggestion made in the report was directed at ‘non-UK resident foreign buyers’. These buyers are only those who are overseas speculators, rather than those bringing their wealth and expertise to the UK by living and working here. The report recommends they should be subject to a 3% surcharge, and this surcharge would form part of the revenue required to finance the reduction in the tax for those selling properties under £500,000.
The other contributors to finance the SDLT reduction include the additional revenue from the resulting predicted increase in the number of transactions in the housing market. From several reports, it was found that on average, a 1% drop in SDLT leads to an average 20% increase in transactions in housing and, therefore, implementing the suggestions in the report could lead to a 40-50% increase in transactions in the market. Flowing from this is the increase in SDLT from those transactions, increased planning permissions and new home development infrastructure levies, and increased revenue from building and construction.
Summary
It is clear that the current level of SDLT is stagnating the housing market, with receipts of SDLT (despite their high absolute rates) having dropped in 2018/19 by 7% from 2017/18, the greatest dip since the crisis of 2008; but whether the proposed remedies are right, and whether they will be implemented by the current or any future government, only time will tell.
One thing, however, is clear; notwithstanding the fiscal or economic reality of increasing transactions in the market, the unmeasurable welfare gained from the taxpayer not feeling stuck in a home or area they no longer wish to live in would be priceless.
