Official figures for stamp duty revenue on residential transactions in the 2007-08 fiscal year will not be available until September, but it is likely that more than £7 billion was raised. This would be higher than the £6.5 billion collected the year before, reflecting the buoyant nature of the housing market up to mid-2007 and the number of house sales in the pipeline when the credit crunch hit.
At the time of the 2008 Budget, the Treasury hoped that stamp duty revenue would experience only a modest fall this year. But this is likely to be wishful thinking. The authorities’ reticence to implement measures that directly promote the flow of funding to support new mortgage lending has inevitably accentuated the current slowdown in housing market activity and house price weakness. This is likely to prompt a shortfall in revenue from residential stamp duty approaching £3 billion in the current tax year. And there are also likely to be associated negative effects arising from lower VAT receipts on purchases typically associated with moving house.
With the Bank of England’s latest credit conditions survey highlighting a sharper than expected fall in demand for house purchase, the prospect - in the absence of significant government intervention - is for a protracted period of weakness. If subdued conditions were to persist for a few years, the cumulative effect for the Treasury could easily be forgone revenue of more than £10 billion.
As we pointed out before this year’s Budget, the Treasury faces a particular problem with residential stamp duty. While buyers are able and willing to absorb high transaction costs if they expect the value of their new home to rise quickly, in a weakening housing market it risks acting as a material disincentive to moving. The “slab” structure of stamp duty, under which duty is charged at the highest appropriate rate on the whole purchase price, including the parts below lower thresholds, has meant significant “fiscal drag” in recent years. We have previously estimated that £3.6 billion of the 2006-07 tax take from residential stamp duty related entirely to the introduction of higher rate bands and the drift of more homebuyers into these bands as a result of house price inflation. Looking forwards, it should not come as a surprise if stamp duty exerts considerable friction in the middle and upper reaches of the housing market.
Given that the Treasury is set to forego substantial revenue from residential stamp duty, we believe that the case for reforming stamp duty is compelling. A key goal is to switch to a marginal rate system similar to income tax, so that there are fewer disincentives to purchase properties near tax thresholds, better housing and labour market liquidity and a more stable tax base over time. RICS has also recently advocated a specific proposal for the reform of stamp duty, the centrepiece of which would be a move to marginal rates.
While addressing funding shortage remains critical to underpinning the housing market, the government should not lose sight of the fact that it also has an opportunity to reform stamp duty, and in a way that can support home ownership and first-time buyers.
And while fundamental reform of stamp duty is the aim, we can also see the attractions of embroidering stamp duty measures into a package of measures, designed to improve both the supply of housing finance and borrower sentiment.
The Early Day Motion recently put forward by the Conservatives, calling on the government to raise the stamp duty threshold to £250,000 for first time buyers, echoes our own call for an increase in the nil threshold to £250,000 (although we would not favour the administrative complexity of restricting the concession to first-time buyers). We had previously estimated the full-year cost of such a move as £1.2 billion, but this is likely to be materially less in today’s environment.
A more audacious move would be a temporary concession that removes the higher rate stamp duty bands altogether. The cost of such a move would have made this option unthinkable a year ago, but this may no longer be the case given that stamp duty revenue has already fallen sharply.
The longer the government delays resolving the funding shortfall that lenders face, the greater the likelihood that a high-profile package of measures to stimulate market activity becomes a necessary element of the policy mix.
