Should we reform Stamp Duty Land Tax?

Most countries impose some form of property transaction tax. In England, we have Stamp Duty Land Tax (SDLT) on the purchase and Capital Gains Tax (CGT) on the sale. While only investment and second homes are liable for CGT, all property purchases are subject to SDLT.

The amount of SDLT payable in England depends on the property’s value, and for a primary residential property the rates are:

• 0% up to £250,000
• 5% on the next £675,000 (the value from £250,001 to £925,000)
• 10% on the next £575,000 (the value from £925,001 to £1.5 million)
• 12% on the remaining value above £1.5 million

SDLT rates are higher for those buying a second property (including buy-to-let) and for overseas buyers. The Government also increased the 0% threshold for first time buyers (FTB) in September 2022, meaning they pay no SDLT on the first £425,000 (on properties costing up to £625,000). This is currently due to expire at the end of March next year.

Figure 1: Residential SDLT receipts by year

Source: HMRC

SDLT generates substantial tax revenue. On average, it has raised £6.8 billion (bn) per year since 2006, accounting for around 2% of total UK tax revenue. Receipts in England increased by 15% from £10.2bn to £11.7bn between 2021/22 and 2022/23, according to HMRC.

However, SDLT also has its disadvantages. It can be a significant burden for buyers, adding an average of £6,000 to the cost of buying a home. This rises to over £20,000 for homes in London. As an upfront tax, it can particularly deter FTBs who are a fundamental driver of transactions. As a result, the housing market loses some of its liquidity.

The tax also discourages older homeowners from downsizing, meaning they will continue to live in homes that don’t suit their needs. Around 40% of over 65s say they live in a home that is too big for their needs.

Around 90% live alone or with their partner, yet 70% are in homes with three or more bedrooms. Overall, that equates to 10 million spare bedrooms across 2.6 million underutilised homes. Some of these homeowners may move to free up this space if they weren’t faced with a large tax bill to do so.

Removing SDLT could encourage activity, particularly among FTBs and downsizers. And it has become increasingly common for the Government to manipulate SDLT to influence the housing market. For example, in 2020/21, a temporary SDLT holiday was introduced when the 0% threshold was increased to £500,000. This was designed to stimulate the market, with FTBs potentially able to save a maximum of £4,000. And those buying a higher value property could save up to £15,000. We estimate this contributed to a 24% increase in FTB activity in the following year. It also led to a significant pickup in sales of properties in the £500,000 to £925,000 price bracket.

This suggests the removal of SDLT would provide a fillip. However, changes to the tax also cause unintended consequences. As well as a boost to activity, the holiday also contributed to higher house prices. In the 12 months leading up to the end of the holiday in September 2021, the average UK house price increased by 10%; double the long-term average of 5% per year. This meant house prices rose by £25,000 in a year, suggesting buyers put the entirety of the SDLT saving towards the purchase price.

Pre-announcing policies can also distort the market. For example, in the 2015 Autumn Statement, the Government announced an additional 3% SDLT rate for second homes which would be effective from April 2016. This resulted in a surge of activity before the deadline, with sales jumping by 71% between February and March 2016. Sales then fell back by 60% In April 2016, which is 20% lower than the five-year average for sales in that month.

A further issue is that the SDLT bands are not regularly reviewed. It therefore becomes a stealth tax, affecting an increasing share of transactions. Since the price bands were updated in July 2020, UK house prices have risen by almost 20%. Applying this rate of growth to the current price bands would increase the 5% band to broadly £300,000 – £1.1 million, and the upper 12% threshold to around £1.8 million.

The current Conservative party is looking to partly address this. It is planning an effective SDLT cut by increasing the initial threshold from £250,000 to £300,000. This would cost the Treasury an estimated £3bn a year by the end of the decade but applying this to 2023 reveals that almost 70,000 buyers would not have incurred any SDLT.

This could improve liquidity in the housing market, but cutting SDLT is not a silver bullet, and a multitude of factors drive the housing market. For example, when the SDLT threshold for FTBs was increased to £300,000 in November 2017, it only contributed to a 3% increase in the number of FTB mortgages. And while the SDLT holiday in 2020/21 was successful in stimulating demand, it also coincided with the general reopening of the market from lockdown. Hence, it’s difficult to ascertain how much of the increase in activity was specifically down to the holiday.

Moreover, when the FTB threshold was raised again in September 2022 (to £425,000 on homes costing up to £625,000) it did not offset the drop in demand caused by rising interest rates. As a result, FTB activity still fell by 17% in the year following the introduction of the higher threshold. This intervention may have also been ineffective as – apart from London – the average FTB house price was already below the original £300,000 threshold.

This illustrates that while SDLT can stimulate demand, it cannot always counteract the broader macroeconomic influences on the housing market. Hence, the effectiveness of the Conservative party’s current proposal to cut SDLT will also depend on the wider macroeconomic factors at any given time.

Of course, abolishing SDLT means the Government would need to fill a 2% tax revenue gap. One option might be to extend CGT to all home sellers. But while this would benefit FTBs, it may still discourage older homeowners from downsizing. Any potential changes would need to be carefully analysed and modelled to understand the impacts on various parts of the housing market, including socioeconomic groups, geographic regions, and price bands.

Notwithstanding the revenue considerations, a removal of SDLT could improve the liquidity of the housing market. This in turn would convey broader economic benefits. We therefore suggest it should be considered as part of a multifaceted solution to our current housing crisis, which we outline in the full series here.