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Aston Chase demand reform of Stamp Duty to reinvigorate London property market

Aston Chase demand reform of Stamp Duty to reinvigorate London property market

A report by inner London estate agent, Aston Chase, has argued that onerous Stamp Duty charges have stagnated the London market and require urgent reform. Property transactions in inner London have declined by 7 per cent according to the report, with house prices following suit.

However, the government is reliant on property and wealth taxes for 7 per cent of tax revenues, with 2.7 per cent of GDP made up from the charges (the second highest in the world). Thanks to large estates, receipts from Stamp Duty have increased by £1 billion over the last year. In addition, £2 billion has been bagged due to the 3 per cent levy on second homes according to Black Brick.

However, last year intake for individual properties actually fell 3 per cent on 2015, to £9.56 million. Aston Chase blames this on the tax, which adversely impacted transaction rates.

What is the current law?

Stamp Duty was raised for homes worth over £937,500 in 2014 by George Osborne. The Chancellor increased the tax on a £2 million home by over £50,000, whilst raising tax on a £5 million home by over £160,000. In April 2016, a 3 per cent levy was introduced on second homes.

Buyers pay 12 per cent on the value of properties over £1.5 million homes, just under the average cost of a terraced home in Camden according to Zoopla.com. The average terraced home in the borough at a purchase price of £1,664,878 transacted today would require Stamp Duty of £113,535. A flat costing the average of £720,094 would demand £26,004 in Stamp Duty.

What’s the problem?

Aston Chase argue that penalizing the buyer rather than the vendor or owner is unfair, and disproportionately impacts buyers in London. The USA, and several European countries have systems that charge the owner. This week, Mayor Sadiq Khan has argued for devolution of control over property taxes in his draft Housing Strategy for London.

The agent says that Council Tax in its current guise undercharges those living in larger homes, and overtaxes those in smaller properties, argues the estate agent. Council Tax bands have not been updated since 1991 and as such do no reflect changing property values, nor does it differentiate between homes of varying values in the same area.

Mark Pollack, founding director of Aston Chase says: “Stamp Duty is a property transaction tax which has no sound economic basis. It is simply a charge on moving house, which may reduce a person’s ability to move for work, and encourages people to live in homes that are too large (or small) for them. What is required is an annual or exit tax, rather than an entry tax.”

A recent study by Lloyds Bank reported that 24% of buyers cited Stamp Duty as the largest factor preventing them from making their second step on the property ladder, and meant they relied on the Bank of Mum and Dad to help.

What are the alternatives?

The agent argues instead that Stamp Duty should be reduced or abolished, in its place enforcing a capital gains tax on primary residence to be paid by the vendor. Alternatively, Council Tax could be reformed by increasing rates for higher value homes or the creation of additional top and bottom bands.

Mr Pollack continues: “If the government wants to retain Stamp Duty then there is a very strong case for reforming the structure of the tax so that simply applies to the value of a property above a threshold rather than the whole value. This would cut revenues by half, but could be balanced by Council Tax rates being reformed.”

Another idea is to introduce a Housing Consumption Tax introduced in place of Council Tax. A flat 0.5 per cent annual tax on the gross value of the home would raise £20.8 billion per year, double that of Stamp Duty currently, according to The Institute for Public Policy Research. This system would rely on valuing different areas and properties across the country.

Additional ideas include following the lead of other European countries to implement a UK Net Wealth Tax, or tax free holidays taken on the capital gains received upon the sale of a home could be abolished. Whilst flawed, Aston Chase argues that implementing the taxes would be beneficial long-term and reinvigorate the market for movers.

Simon Deen, director and head of new homes at Aston Chase says: “All the alternatives that exist in other countries are imperfect, however the UK system is in need of a major overhaul. For example, under the current Council Tax system a person in a one bedroom flat can pay the same Council Tax as the owner of a large house, the system is clearly flawed and could be reformed so that Council Tax levels more closely reflect property capital values.”

Whilst government revenues would fall by £10 billion per year due to the loss of Stamp Duty, a flat-rate local property tax would exceed those receipts, says Mr Deen.

Aston Chase are not alone in their demands. Buying agent Black Brick said: “We would be delighted if the government was prepared to revisit the hike in Stamp Duty. Without doubt, it has reduced transaction levels and added considerable friction to the process of buying and selling property.”

How likely is it?

Numerous reports into property tax have argued for a revision of the current Stamp Duty laws to place the onus on the owner, including Barker (2004), OECD (2011) and Stephens (2011).

The government is under increasing pressure to reform the tax, with Tory leadership favourite Jacob Rees-Mogg backing scrapping the tax, and one unnamed minister urging the Chancellor to “deal with” the tax.

Cuts to Stamp Duty on more expensive properties are likely to go down like a lead balloon from a political standpoint, with Mr Rees-Mogg himself owning a Grade II* listed home in the countryside. As many will see cuts to Stamp Duty on multi-million pound homes as ridding the wealthy of a punitive charge that equates to mere peanuts, cutting the tax would likely be seen as political suicide, with tax increases far more likely than tax cuts.

“The reality is that a cut in rate levied on more expensive properties is highly unlikely,” conclude Black Brick.

Mr Pollack concludes: “If the current Stamp Duty regime continues we face the dangerous possibility that more and more vendors will decide that rather than moving home they will simply refurbish their existing home and gradually the London property market will stagnate and government property tax revenues will start to decline – defeating not only the government’s revenue objectives but also creating a moribund property market.”

Source: http://www.hamhigh.co.uk/property/aston-chase-demand-reform-of-stamp-duty-to-reinvigorate-london-property-market-1-5185941

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