Don't Meddle With Stamp Duty!

Chancellor Alistair Darling is desperate to avoid a house-price crash. But fiddling with fees at the fringes is futile.

On Tuesday morning, during an interview for BBC Radio 4's Today programme, Chancellor Alistair Darling hinted that he may fiddle with Stamp Duty Land Tax (commonly referred to as `stamp duty'). Stamp duty is a tax which is levied on buyers of property, but not sellers. It is payable within thirty days of completion, and is calculated as follows:

The odd thing about stamp duty is that it is not a graduated (stepped) rate. In other words, when you move into the next threshold, you pay the higher tax rate on the entire purchase price, not the excess above this ceiling. For example, stamp duty of 1% on a property costing £249,999 is £2,499.99. However, for a property bought for £250,001, 3% tax comes to £7,500.03.

Stamp duty on various documents was introduced into the UK in 1694 by William and Mary, in order to pay for the war against France. In 1808, it was extended to property transactions, so this tax on homeowners has been in force for two centuries.

These are taxing times

Obviously, with house prices falling at the fastest rate on record, the Government is desperate to avoid a house-price crash akin to that which rocked the UK in the early Nineties. Hence, the Chancellor has indicated that he may temporarily suspend or defer stamp duty. (Of course, he was deliberately vague, as always happens with these carefully spun proposals.)

Last year, the Government collected £6.4 billion in stamp duty, an eightfold increase on the £800 million collected a decade earlier. However, as property transactions plunge, stamp duty's contribution to the public purse is expected to halve in 2008. Hence, with sales falling off a cliff, the Government may collect under £3.2 billion in stamp duty this year.

With the nation's finances already stretched to the limit, the Government will not abolish stamp duty across the board, as this would be too big a loss to swallow. At most, the Chancellor could temporarily suspend stamp duty on sales under £250,000. Even more likely, he could defer payment of stamp duty, allowing us to `buy now and pay later'. In other words, the Government would give homebuyers interest-free credit on their stamp duty bill.

Why this is a loopy idea

Although I'm all in favour of tax cuts, tinkering with stamp duty is a daft idea, for these reasons:

• It will benefit only a few hundred thousand people, but any shortfall in tax revenue would have to be covered by all of us.
• Thanks to high house prices, higher mortgage rates and steep arrangement fees, stamp duty is a minor expense, particularly on purchases under £250,000.
• I vividly remember the Conservatives trying this trick back in December 1991. The Government waived stamp duty on purchases under £250,000 for a nine-month period. Alas, both house prices and sales fell in 1992, and the property market continued to slide until 1995.
• With personal debt at an all-time high and disposable incomes falling, giving buyers a stamp-duty holiday would be a big mistake. History proves that taxes should be collected at the earliest possible opportunity, which is why employees have PAYE (Pay As You Earn), instead of a yearly income-tax bill. Thus, postponing payment of stamp duty will lead to defaults and bad debts.
• By attempting to bribe potential homeowners so early in the property downturn, the Government could fall foul of the `Law of Unintended Consequences'. This news should cause sales to slump, as buyers wait on the sidelines for a break from stamp duty. Indeed, it could panic some buyers into shelving their plans altogether. This will increase the pace of house price falls - not help to avoid a house-price crash!
• With the public finances at breaking point, the Government simply doesn't have the financial firepower to tackle falling prices in a £5.8 trillion market (the total value of all 26 million residential properties in the UK). In fact, with the value of housing falling by more than £1.5 billion a day, the Government is almost powerless to intervene.

There is one easy way out...

The real problem for homebuyers is that, thanks to the credit crunch, mortgages are more expensive and harder to obtain. Furthermore, thanks to the loss of our savings habit, amassing a decent house deposit (say, 10%+) is a tall order.

In my view, the Government can do little but to ride out the political storm to come. However, we as individuals can act to improve our own personal finances. For example, the UK's savings ratio -- which measures how much of our take-home pay we save -- is the lowest it's been for 49 years. By saving harder, we can create a bigger cash cushion to ride out the hard times.

Finally, as a nation, we have to accept that, after a decade of easy credit, we now face the reality of tough debt. The simplest way to make housing more affordable is to allow prices to fall to a sensible level. This will benefit everyone who plans to reach for or ascend the property ladder. The only people who benefit from sky-high house prices are property investors and elderly homeowners who sell never to buy again.

Disclosure: In December 1992, Cliff bought a house for 28% off the asking price, which he sold in April 2005. As a tenant, he has been out of the market for three years and stands to benefit from falling house prices.

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