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Perfect present

As Christmas fast approaches, the gift at the top of the industry’s wish list is a raise in the Stamp
Duty threshold to help first-time buyers, says Helen McCormick

Stamp Duty has never enjoyed much popularity. Although the existence of a form of Stamp Duty can be traced back to Roman times, its current form originated in the Netherlands in 1624. This was as a result of a competition to find a new form of tax – the Dutch have clearly always known how to have a good time. There is no known record of the inventor’s name but the winning idea required that certain legal documents be written on stamped paper.

Stamp Duty was first introduced into the UK in 1694 during the reign of William and Mary to help pay for the war against France. The duty was on vellum, the parchment used to draw up the contracts.

As with income tax, which was introduced to finance the war against Napoleon, the four-year end date was conveniently forgotten because Stamp Duty turned out to be an easy way to raise revenue. And in many ways it still is. The Council of Mortgage Lenders says the take from residential Stamp Duty has risen from £830m in 1997/98 to £3,590m in 2002/03, a massive 433% rise. No wonder then that chancellor Gordon Brown is reluctant to scrap it.

In 1765 the attempted imposition of such duties in the US was met with opposition throughout the colonies. Protest meetings were held. The arrival of ships bearing consignments of stamped papers was attended by major rioting – the best known being the Boston Tea Party.

And yet this much-reviled tax is still firmly with us. In 1808 Stamp Duty was first imposed on conveyances on sale. At the same time, duties in England and Scotland were made equal. Today, Stamp Duty is payable by buyers of the majority of freehold properties and land over a certain price, with the lowest threshold currently being £60,000. From £60,001 to £250,000, it’s 1%; over £250,000 buyers have to shell out 3%, and over £500,000 it’s 4%.

It is worth noting that Stamp Duty exemption has been available for the purchase of residential property in designated disadvantaged areas of the UK, and where the purchase price does not exceed £150,000. It is therefore well worth reminding your clients to check if their area qualifies. But of course this applies to very few borrowers – most will have to cough up.

Mortgage Strategy, along with many others in the industry, wants just one thing for Christmas (although those sparkly shoes I saw last week were lovely) – the raising of the lowest threshold of Stamp Duty from £60,000 to £150,000. Since this would cost the Treasury a vast amount in lost revenue, it will take some fighting for.

But it will be worth it. Stamp Duty thresholds were originally designed to avoid having to tax struggling first-time buyers. The £60,000 level was set 11 years ago in 1993. Since that time house prices have risen dramatically so this draconian tax is hitting first-time buyers hard. The days when the average starter property cost under £60,000 are long gone. The average these days is nearer £150,000, which means almost every first-time buyer has to pay 1% to the taxman, never mind still having to stump up the cash for a deposit and foot the bill for all the expenses that a mortgage entails.

In real terms, for a £150,000 mortgage, this means the buyer needs to find another £1,500, which, as our box (overleaf) shows, could be spent on far more interesting things.

Support for Mortgage Strategy’s Step Up Stamp Duty campaign to raise the bottom threshold to £150,000 in line with house price inflation has been overwhelming, with thousands across the UK already signed up to the cause. Both the Conservatives and the Liberal Democrats have thrown their weight behind our campaign.

“Stamp Duty is a grossly unfair tax and we welcome Mortgage Strategy’s campaign to make it less onerous,” says shadow chancellor Oliver Letwin.

Indeed, the Tories have made Stamp Duty a key policy commitment, and recently unveiled five options for making Stamp Duty fairer for house buyers – on the same day that Mortgage Strategy launched its campaign.

“Stamp Duty is a classic Labour stealth tax,” adds Letwin. “Since coming to power Labour has failed to raise the threshold of £60,000, despite massive increases in house prices.”

David Laws MP, Liberal Democrat chief secretary to the Treasury, is also supportive. “It is time to radically reform this tax by significantly increasing the tax-free threshold and reforming the irrational rate structure,” he says. “This is grossly unfair to those on low incomes and to first-time buyers who are struggling to get onto the property ladder. In London and the south of Britain, there can now be very few first-time buyers and other low income buyers who are escaping this tax.”
The industry wasn’t impressed when Brown failed to mention Stamp Duty in his pre-Budget report, a document which in fact made little mention at all of the housing market. Brokers in particular are concerned that the impact on first-time buyers will have a damaging effect on the market.

“The market is slowing down because of the measures the government has already taken, but if it is not careful it could kill the market,” says John Stewart, director of PMI Independent Financial Adviser.

Mark Chilton, chief executive at Purely Mortgages, says the government is making excuses. “The government could restructure Stamp Duty without any effect on the Stock Exchange,” he says. “It is very disappointing for first-time buyers.”

Ray Boulger, senior technical manager at Charcol, says he is disappointed but not surprised at the omission. “We often hear that the government is keen to remove all inequality in the tax and benefits systems, but actions speak louder than words, especially from the chancellor,” he says. “Brown’s silence on reforming the structure of Stamp Duty land tax is deafening. Abolishing this tax was always a non-starter, but Charcol would have liked to see it reformed to reflect the way income tax is structured.”

As Boulger points out, with Income Tax the higher percentage rates of tax are only payable on the amount of income over certain thresholds. However, with Stamp Duty once you reach a certain level, borrowers are forced to pay the higher percentage on the total amount.

“As expected the chancellor has yet again demonstrated his preference to perpetuate an unfair tax rather than undertake a well overdue reform,” he adds. “Therefore we would encourage a back bench amendment to next year’s Finance Bill to at least highlight this problem further and hopefully gain enough support to become law.

“As a general election is expected shortly after the Budget, even if the amendment fails at least the publicity could help to make this a live election issue.”

In 1977 the then backbenchers the late Audrey Wise and Jeff Rooker, now Lord Rooker, spectacularly won the day with an amendment to the 1977 Finance Bill, which became known as the Rooker-Wise amendment. As a result of this success Income Tax thresholds have automatically been increased each year in line with inflation, unless the chancellor specifically overrides the increase. Such a clause automatically avoids stealth increases in taxation creeping up on us again.

Charcol is pushing for the lowest rate of Stamp Duty to be even higher than £150,000. “A sensible starting point for the 1% tax band would be the average property price, based on Land Registry figures, i.e. currently £188,000, and the annual inflation adjustment, up or down, should also be based on Land Registry figures,” explains Boulger.

Simon Hood, chief executive of insurance provider Select & Protect, says the industry should take some responsibility for pushing through change. “With first-time buyers finding it increasingly difficult to get a foot on the property ladder, it is our industry’s duty to find sustainable ways of helping them to take the first step,” he says.

“Therefore I wholeheartedly support Mortgage Strategy’s campaign to increase the Stamp Duty threshold to £150,000. An increase will put real money back into the pockets of first-time buyers and should help to stimulate the market.”

Lenders too were surprised at the omission of the issue from Brown’s report, and cite their own lending patterns as evidence that change is needed. Mike Perry, associate director, sales and marketing at Amber Homeloans, says the average Amber mortgage is £120,000, which means all buyers, including first-timers, are having to meet the additional cost of Stamp Duty.
“Mortgage Strategy’s suggested threshold of £150,000 would not only take into account inflation, but may allow many would-be buyers the opportunity to gain access to the property ladder,” he says.

Jeff Knight, head of marketing at GMAC-RFC, agrees. “When I bought my first property some time ago I paid Stamp Duty,” he says. “As a first-time buyer this was, at the time, more the exception than the norm. But this tax applies to the majority of first-time buyers now – it must be brought up-to-date.”

Halifax figures say the average first-time buyer now pays more than £1,000 in Stamp Duty, equivalent to around 6% of their deposit or around two weeks of their annual income.

In 1993, the typical first-time buyer paid no Stamp Duty, with London the only region where the average first-timer paid the tax. In 2003 the average first-time homeowner in every region of the UK paid Stamp Duty. Halifax believes that, at the very minimum, property tax thresholds need to be aligned with house price inflation.

Sources close to the Labour party believe the Stamp Duty issue may be addressed as part of the Labour manifesto before next May’s general election. Others are more sceptical. Mortgage Strategy columnist Monty Burn, who has been vocal on the issue of Stamp Duty for some time, believes the government has its own reasons for avoiding the subject.

“There is a massive black hole in the economy and the Treasury is borrowing more and more,” he says. “Brown won’t want to give up Stamp Duty, so in some ways this seems like a bit of a lost cause.”

Peter Bolton King, chief executive of the National Association of Estate Agents, agrees that the government will be reluctant to give up this revenue stream. “Stamp Duty was never meant to be an all encompassing property tax, but with the chancellor’s refusal to adjust the scale, one can’t help wondering whether he is beginning to look on it as a contribution to his shortage in his spending,” he says.

“Homebuyers should not be forced to pay for the chancellor’s errors in his budgeting. By failing yet again to bring this tax into the 21st century the government is faced with the possibility of the total extinction of first-time buyers and serious effects on the health of the rest of the market.”

Burn is not entirely pessimistic. “If there is a massive groundswell of public and industry opinion, Brown will be forced to review it,” he says.

Industry support seems unanimous, and homeowners, unsurprisingly, want reform too. Research by The Woolwich shows that 79% of homeowners think Stamp Duty should be scrapped for first-time buyers. Over half – 64% – also believe that the thresholds for Stamp Duty should be raised as house prices have more than doubled in the past five years.

“The most important step is to raise the bottom threshold to give first-time buyers a boost – the other thresholds are less crucial,” says Burn. “As many people as possible should get behind Mortgage Strategy’s campaign – it can make a difference.”
Brown faces some heavyweight lobbyists. The Council of Mortgage Lenders has been pushing for a change in the structure of Stamp Duty for some time, as well as that of Inheritance Tax and Capital Gains Tax, and it reiterated this in its pre-Budget submission.

The CML argues that property-based taxes in the UK are already among the highest in the developed world and should be indexed in line with house price inflation. The submission calls for more fundamental reform of Stamp Duty to remove the market distortions it creates.

In its submission the CML speculates on why these logical changes have never been made. “Obviously, we feel thresholds should be increased substantially to reflect the increasing burden that homebuyers and owners have had to deal with over recent years,” it says.

“However, if the chancellor and Treasury do not agree we believe their reasoning should be made clear. Is the reason the need for increased revenue to fund public services? Is the reason linked to some co-ordinated, or even unco-ordinated, approach to influencing the housing market?

“Moreover, given the government’s concern to help those trying to enter the market, it is ironic that this approach to taxation, notably on Stamp Duty, is actually adding to the barriers for entry.”

Cynics may well argue that is indeed the point – the government may be wary of stimulating further growth in the housing market. But to keep first-time buyers off the ladder can only spell trouble for the future.

“Three-quarters of first-time buyers now have to pay Stamp Duty, a complete reversal from 1997 when three quarters of first-time buyers bought properties below the threshold,” says CML deputy director-general Peter Williams. “Without a change in app-roach, the tax burden on homeowners will continue to grow year after year.”

So Gordon – how about spreading a little Christmas cheer and addressing this issue. Make 2005 the year of the first-time

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