As house prices continue to rise, and mortgage lending tightens, getting on the property ladder in the UK is becoming increasingly tough, if not impossible for many. Zoopla recently reported that with 2016 almost coming to an end, house prices grew by £19,348 or almost £57 per day (link here). With average salaries in the UK at around £27,000, you can see that it is almost impossible for an average person to buy an average-priced house in the UK. On top of this, for an average house in the UK priced at £325,575 the buyer needs to find an additional £6,279 for the stamp duty.
Recent governments have attempted to take various actions to rein in house price increases (stamp duty land tax “SDLT” changes) as well as help first-time buyers (Help to Buy, Lifetime ISAs).
SDLT is inherently a poorly thought out tax since it taxes (and thus restricts) the mobility of labour which cannot be good for an economy. While we would love to say that stamp duty should be abolished, the reality is that given the precarious state of public finances, removing such a tax is both politically and economically not feasible. One consideration appearing to gain traction is of transferring the burden of stamp duty from buyers to sellers.
At first glance, it would not matter where the burden of the tax fell – buyer or seller. In theory, if someone is selling and buying at the same time, then they will pay stamp duty on one of the transactions and it doesn’t really matter. However if the burden was passed to the seller, then those trading up would benefit and this should be seen as aspirational while those trading down (generally older people who have already benefitted from the increase in prices) would pay more. This is even more powerful when put in the broader social and economic context, where we find that the baby boomers have benefited hugely from two main themes – rising property prices and final salary pensions schemes.
Given such increases in property values, it makes sense to transfer the burden of this tax to the seller. They are (generally) best placed to pay it from the gains they have made. While the simple counter-argument is that sellers will just stop selling, we don’t believe that to be the case and while they may increase the price, ultimately it’s the market that would decide the price and over time this effect will be diminished. As an aside, it may be easier for a buyer to pay an extra £6,000 for a property if he saves £6,000 of up-front stamp duty since he would be able to take a mortgage on the former but not the latter. We would suggest that the 3% additional SDLT remains payable by the Buyer.
Implementation would have to be done gradually to avoid stalling the property market – shifting 25% of the liability to the sellers over a 4 year period.
Such a move would of course npot be popular with everyone. Below we look at some of the arguments and dissect them.
- Sellers already pay Capital Gains Tax (CGT) so this would be a double whammy – This is a weak argument. CGT is paid on profits and while no one likes to pay tax, a tax on capital gains would appear to be one of the more reasonable ones.
- Sellers may not be able to afford to sell if they have to pay both CGT and SDLT – For those who have over time levered themselves up such that any sale would be prohibitive since the CGT and stamp-duty might leave them with no (or negative proceeds), there can be limited sympathy. If they have levered up to buy more properties or assets, in all likelihood they will have value in those assets. If they used the money for holidays, cars or the like, then the sympathy is even less since it is not the government’s job to pay for such non-essential expenditure. We feel as lending standards tighten (and remain tightened), such property owners will slowly wash out of the system as owners pay down mortgages or through house price increases.
- Banks selling repossessed properties would lose out – yes they would since the cost of selling a property goes up. We think this might be the main reason why this policy has not been implemented. We can imagine the opposition from banks would be very high since it would impact their recovery from selling repossessed assets. Ultimately this would be a cost of doing business and banks would have to adapt.
I guess the question is what has all this got to do with buy to let? We have recently seen the government attack landlords on multiple fronts (S24, an increase in SDLT for second homes) and it seems that buy to let is being perceived as the root cause of the housing crisis in this country. The elephant in the room is that successive governments have not addressed the supply side of the housing shortages in this country. At present, we see little that is changing to the extent that is necessary. Any supply side changes will require massive housebuilding and almost certainly a relaxation of planning permission on the green belt. Such actions will take decades to implement. In the meantime, there are shorter term actions that governments can take to help first-time buyers. We agree with the broad concept of the 3% additional SDLT for second homes (although it can raise some very tricky situations for some people). We don’t agree with S24 (the reduction of interest relief) which is not a very well thought out tax and will ultimately result in higher rents. The real solution will need policies that increase the supply of housing stock and reduces the friction for property transactions. We think transferring the burden of SDLT from buyers to sellers is a way to achieve the latter in a reasonably short timeframe.