A few days from now we will be treated to Gordon Brown’s last budget as chancellor and for the first time in a number of years there are rumours circulating that a big change to Stamp Duty could be on the cards.
As we know, previous calls for any kind of serious reform have fallen on the deafest of deaf ears but the chances are that the chancellor may do something now he has a clear political motivation to do so.
The pre-Budget report disappointingly held little promise of any significant change so at John Charcol – like the rest of the industry – we prepared for nothing.
But rumours have been gathering momentum in the financial press, and in particular the notion that we may see a higher band of Stamp Duty introduced for homes that are worth more than £1m. The word on the street is that these properties will be taxed at 5%.
While we would support the introduction of such a band, there is no escaping the fact that once again this move would fail to address two important issues – the lower end of the market, which is where the most pressing problems lie, and distortions around the thresholds. In fact, looking cynically at this proposal, it seems simply to be a way of increasing the haul from the tax.
One obvious way to improve the system would be for Stamp Duty to mirror the way Income Tax is structured so that the higher rates of the tax are only payable on amounts over certain limits. This structural alteration need not result in a reduction in the overall amount of money gathered in by the tax. Rather it would be about adjusting the thresholds.
With the average house price now standing at around the £200,000 mark, the lower limit should be raised to this level rather than the meagre £125,000 at which it now stands, and other thresholds should increase accordingly.
Nominal increases, such as the rise of just £5,000 for the first threshold level in last year’s Budget, simply serve to exacerbate the issues facing first-time buyers as pro- perties are repriced upwards towards the lowest threshold. The system is quite simply flawed and requires a complete overhaul to bring it into line with the reality of the property market.
So here’s a thought on how it could work better – why not start a new tax band at 0% up to £200,000, have 5% on the next £800,000 and 6% on anything above £1m?
In this scenario, the tax payable on a £500,000 purchase would be exactly the same as it is now – namely £15,000 – and a £1m transaction would again be the same at £40,000. At all other prices below the £1m mark the tax would be lower and all purchases above this price would incur a greater tax liability.
While this may be just dream, should the current chancellor not make a major change the next incumbent should strongly consider a total reform of the system. There must be a way to gather as much money from the tax while not distorting the property market and giving first-time buyers yet another headache they could live without.