Scotland's Stamp Duty Becoming Fairer than England's?
Posted on 13 March 2014 by
It would be not be exaggerating to describe the current structure of stamp duty land tax (SDLT) as absurd. But with the budget just under a week away the time for the perennial annual focus on SDLT has again arrived. It has always been obvious that it is virtually impossible to achieve a sale price a little in excess of one of the various SDLT thresholds, but particularly £250,000 and £500,000 and now £2m. The only question is how far above the threshold does it cease to be an issue. I suggest the no go price ranges at the lower bands are broadly £125,001 - £135,000 and £251,000 – £270,000.
Many homes are sold to includes some items, typically carpets and curtains, which can legitimately be classified as fixtures and fittings and don’t have to be included in the sale price for the calculation of SDLT and so in some cases splitting out items such as these, which may well be worth several thousand pounds, will be a way of achieving a total sale price a little in excess of one of the thresholds.
Whilst one has to be realistic about the values put on fixtures and fittings in this context the value of, for example, carpets and curtains which a buyer likes, which are in even only reasonable as opposed to good condition, will be significantly greater to the buyer of a property than anyone else as it allows them to move in without the extra hassle and expense of buying and having fitted new carpets and/or curtains.
Since Gordon Brown introduced tiered stamp duty land tax rates in his first budget the situation for buyers has progressively deteriorated because:
· The value of an increasing proportion of properties has crossed one or more of the thresholds.
· The £250,000 and £500,000 threshold levels have not been changed since they were introduced and so fiscal drag has generated a huge amount of extra revenue for the Government and cost for purchasers.
· All Chancellors claim they believe in fair taxation but every year the current system continues the current and previous Chancellors proves this is a lie.
What is so frustrating is that it is so patently obvious to everyone, except apparently the Chancellor, how the current slab system could be reformed to make it fairer and avoid the current no go price ranges for property sales. The only question which should be up for consideration is the detail, not the principle.
There are no doubt other options but the most obvious one is to change to a progressive system similar to that used for income tax and it is difficult to understand why The Chancellor has so far refused to make the system fairer and eliminate its obvious deficiencies, especially as he could sell it as a way of making a flawed system introduced by the previous Government fairer.
HMRC produces figures for the number of properties sold in a range of narrow price bands and so it would be very simple for the Treasury to calculate what rates are needed if, for example, its starting point was that it needed to raise the same total amount of tax.
The lower thresholds really need to be increased, particularly the first one, but a change to a fairer system, even with the same thresholds, would still be a major step forward. A new system could be introduced so that most, if not all, buyers at the lower price ranges paid the same or less tax with perhaps a net increase in receipts in the £1m+ range, as most buyers in this category could, if necessary, find the extra tax by taking out a slightly larger mortgage.
However, at the moment the maximum rate for non residential or mixed use properties is 4% (for purchases in excess of £500,000). If the rates for this type of transaction were brought into line with the rates for residential property that could easily compensate for lower net receipts from residential property sales up to, say, £1m without the need to increase rates for higher value residential purchases. In 2012/13 71% of SDLT revenue came from residential transactions - £4.9bn – with £2bn from non residential transactions.
Furthermore, as property values are rising rapidly in most parts of the UK fiscal drag, particularly when combined with the effect of the thresholds will, in the absence of any changes to the current flawed system, increase the total revenue in 2014/15 by a significantly higher percentage than the average increase in property prices. This makes it an ideal time for a fundamental change to the current system as it provides more flexibility for reducing the tax burden on lower value purchases whilst still generating an increase in year on year tax receipts which is at least as high as CPI.
It is also worth noting that the proportion of SDLT raised by property transactions below £250,000 is low. In 2012/13 only 14% of SDLT revenue from residential property, and 10% of total SDLT revenue, came from the band up to £250,000. Therefore an increase in the £125,000 threshold, even if none of the other thresholds is changed, would have relatively little impact on total SDLT receipts, whist providing an important boost for the FTB market, particularly outside London. Furthermore, such a change would have a significant knock on effect in terms of other tax generating economic activity, which could easily compensate for most, if not all, of the modest SDLT revenue loss.
Another strong argument for increasing the £125,000 threshold is that it was illogical to introduce Help to Buy to make it easier for buyers who can afford the monthly mortgage payments but have struggled to find more than a 5% deposit and then force most of them to find at least an extra 1% tax, which in some cases will be the difference between whether an FTB has enough savings to buy a property or needs to spend longer saving to cover the tax bill.
A simple solution, if the thresholds were not changed, although as mentioned above I see it as a priority to increase the starting point of £125,000 to take a majority of FTBs out of the SDLT net, would be something along these lines for properties up to £1m:
- Up to £125,000: Nil
- £125,000 - £250,000: 2% calculated on the excess over £125,000. This would mean that someone buying at £250,000 would pay the same as now but everyone else would pay less.
- £250,000 - £500,000: 2% on £250,000 plus 5% on the excess over £250,000. This would mean that someone buying at £500,000 would pay the same as now but everyone else would pay less. E.g. at £500,000 it would be £2500 (2% of £125,000) + £12,500 (5% of £250,000) = £15,000.
- £500,000 - £1m: 2% on £250,000 + 5% on £750,000. This would mean that someone buying at £1m would pay the same as now but everyone else would pay less. E.g. at £1m it would be £2500 (2% of £125,000) + £37,500 (5% of £750,000) = £40,000.
One factor which I think significantly increases the likelihood of a change in this year’s Budget to make SDLT fairer is the Scottish Parliament’s The Land and Building Transactions Tax (Scotland) Act, which received the Royal Assent on 31 July. The major change included in this Act is a move to a progressive as opposed to a flat rate levy, with The Scottish Parliament planning to introduce this new Land and Buildings Transaction Tax in April 2015, to replace SDLT. It will cover both residential and non-residential transactions.
The Scottish Parliament has not yet set the rates for this new tax but the Bill indicated that the price at which the tax will start to be levied will be significantly higher than £125,000, with a figure of £180,000 quoted as an example. However, as the average property price in Scotland is lower than the average elsewhere in the UK, taking this as a guide would suggest the starting point for SDLT for the rest of the UK should be increased to around £200,000. If so it would be a nonsense to have a threshold at £250,000 and so moving the first threshold to £500,000 would make sense, which would still mean the tax had more thresholds than when Gordon Brown introduced it in 1997.
If The Chancellor does not announce a move away from the slab system in this year’s budget it will give Alex Salmond an ideal opportunity (he is likely to be clutching at even more straws by then) in the referendum debate to justifiably claim that with its new taxation powers Scotland has made the taxation of property fairer. There seems no logical reason why The Chancellor would score such an obvious own goal by not taking his last opportunity before the Scottish referendum to radically reform SDLT.
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