Posted on 24 March 2010 by
The news today that the chancellor is abolishing stamp duty land tax for all first time buyers up to £250,000 is excellent for a group of buyers who have been desperately bereft of reasons to smile for many, many years. The move will undoubtedly help many people achieve home ownership and we need only look at the recent extension to £175,000 for proof of this. Of course, the devil is in the detail, and policing this may prove to be a tricky task.
That said, we should not let this modicum of good news mask the bigger picture. The announcement of an increase to 5% on the tax payable on properties worth £1 million and over is a mistake as it stands, without fundamental, underlying reform. It provides the perfect example that the way that stamp duty is calculated is archaic and is in need of desperate reform. The current structure significantly distorts the market around the threshold levels; however, there is a very simple way to address this. We have argued for many years that stamp duty should mirror the way that income tax is charged, with the rate of tax only payable on the amount over certain thresholds.
A second time buyer wants to purchase a home priced at £250,000. At current rates they would pay 1% in stamp duty land tax for this property, i.e. £2,500. However, if competition for the property pushed the price up to £252,500 they would have to pay £7,575. Thus a 1% increase in the price of £2,500 results in a 203% increase in the tax to £5,075.
Suggested new structure
Our suggestion would be for the new tax rates to be 0% on the first £200,000, 5% on the next £800,000 and 6% on anything above £1m.
Adopting this system would eradicate the distortions at the thresholds and allow for realistic pricing in the market. No-one in their right mind would put a property up for sale at £260,000 currently, but a property that was bought for £200,000 and has increased in value by 30% is worth £260,000. The fact that you could never sell it for that is simply wrong. Someone should address this urgently.
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