What message did George Osborne deliver in his 2014 Budget by making changes to Stamp Duty Land Tax? Screw the rich? Probably not – it was a political measure designed to pull the rug from under the feet of the Labour party which was then proposing a mansion tax on high end properties.
It may have been an astute political move – but it has left a noticeable strain on the high-end residential property market.
In short George Osborne increased stamp duty land tax from a maximum rate of 7% to 15% and in so doing created the worst property market in London for twenty years. Furthermore, the revenue he predicted it would generate, simply has not materialised.
It is not because buyers have found some fancy way to avoid the tax – they have simply stopped buying and selling!
The rate of tax affects people’s behaviour. This is a fact Laffer understood, but it seems few Chancellors grasp as they make changes to our tax legislation to score political points!
Arthur Laffer was a supply side economist who drew a bell-shaped curve to show the relationship between tax rates and the amount of revenue collected by governments. The higher the tax rate the fewer people engage in the activity from which the tax is generated – in this case buying and selling residential property.
From the increases in revenue these new rates were expected to generate, the actual revenue generated has fallen woefully short, and this is to ignore the wider perspective.
A fall in the buying and selling of expensive residential property impacts on the businesses which feed off a buoyant high-end housing market; estate agents, architects, interior designers and so on. Furthermore, one stated intention was to lower the price of London’s overheated residential market, but this has not materialised to any great extent.
Our government needs to focus on a tax system which fills our capital city with houses and apartments which are full of people who live in them; they will then be spending in our shops, eating in our restaurants, engaging the services of our plumbers, electricians and carpenters.
So, what would I do to achieve this – ignoring any political objective?
Before April 2014, the highest rate of stamp duty land tax was 7% on all the value of a property worth in excess of £2 million. This was called the ‘slab’ system. After, April 2014, the rate of taxation was at 12% but only on the value in excess of £2million and at the lower rates below. So, for a property worth £2 million before April 2014 £100,000 tax was payable, but if it was worth £2 million and one pound, tax was payable at £140,000 (if owned by an individual and not a second home). However, after April 2014 tax was payable at £153,750 whether on a £2 million property or on a property of £2 million and one pound.
George Osborne did well to get rid of the ‘slab’ basis of taxation and lower the rates at the lower end, it removed distortions in the residential property market and has created a buoyant market for the less expensive homes.
However, at the upper end he not only introduced a swingeing high tax rate of 12%, but an increase of 3% on all rates if a residential property was bought through a company or if this was a second home. This puts the top rate of stamp duty land tax to 15%.
The reason for putting up the rate for ownership for a company is because companies do not die – which means no inheritance tax is payable on the death of the owner (in particular if non-UK domiciled).
For second homes, could the reason why George Osborne put up the rate was because he did not want to be seen to be favouring the rich?
Under the current system of stamp duty land tax, however there are many Londoners who now struggle to upgrade for the growing needs of their family or to downsize to provide a first home for their adult kids. This lack of mobility is not fair for those working and living in London. There should be a return to the maximum tax rate of say 7% for UK residents for whom their property is their main or only residence (a term taken from capital gains tax legislation).
Then I would like to see a higher rate for UK residents who want to buy a second home. The rate I would suggest is say 10%.
Finally, I would like to see a third rate of say 12% for all non-UK residents and corporate owners, (other than companies providing buy to let properties which should be charged at the 7% rate).
By lowering the rate at which stamp duty is payable for UK residents, the government would also encourage people who have not been able to sell their high-end properties now to do so. I believe these changes would have a dramatic effect on the demographic in London which could filter through quite quickly.
Ironically, although the stated intention of George Osborne was to lower the prices of London properties for people who work in London and to fill them up with people who wanted to live here, in fact he achieved just the opposite. However, by introducing the above changes, I think we could achieve not only a London full of people who want to live here, a buoyant market both at the high end and low end but also a dramatic increase in revenue!!!
Please let me have your comments.