Late in 2017, the Chancellor’s decision to let first time buyers be exempt from stamp duty was welcomed by many. Reducing the tax burden on the purchase of a property makes considerable sense.
Indeed, many advocate a re-gearing of Stamp Duty Land Tax to being a tax on the proceeds of the sale of a property rather than on the purchase price. This means buying a property would be cheaper for all and the tax could be collected on sale proceeds, preventing anybody from borrowing to pay the due tax.
However, the higher rates of tax now implemented severely restrict movement within the market. The amount of tax charged is putting people off moving and in some cases creating a block to people moving. This affects people’s ability to relocate and therefore adversely influences a number of other social and economic issues such as people being able to move in order to find new employment or business opportunities. It can also affect families, for instance where a grandmother may move closer to where children and grandchildren are living thereby restricting family childcare assistance and care of the elderly by relatives.
There is no doubt that the rules are complex for some people. The Times newspaper group reported that as many as one in six property transactions are probably incorrectly calculated by Solicitors. This could lead to up to £2 billion of overpayments into the government’s funds.
How does stamp duty work? Read our Article for a Stamp Duty Land Tax summary.
The Stamp Duty surcharge, however, is occasionally catching out people who are buying a new property to live in before selling their original home. An additional 3% tax is levied, which is meant to apply to holiday homes and buy to let purchases.
This is added to each slice of tax levied. Most solicitors and advisors are aware of the rule that it is possible to apply for a refund on the 3% surcharge if you sell your main residence within three years of buying another property. HM Revenue & Customs (HMRC) have paid nearly 7,000 refunds for the 2016-17 tax year. However, the tax is levied on purchase and then needs to be recovered, which can significantly compromise people’s funds to purchase.
There are different Stamp Duty Land Tax rates that apply to different types of legal entity. Commercial entities, companies or partnerships pay different rates to individuals buying residential property. A property that is part commercial has a lower rate imposed.
Any proposed purchase should start off with a calculation of the true financial costs.
Sometimes the Stamp Duty Land Tax makes the proposed purchase just too expensive to make the purchase viable.
To raise more revenue by increasing the costs is reactive and not imaginative. This appears to be the current Chancellor’s attitude. Arthur Laffer’s approach would undoubtedly help the purchase of property and help stimulate the economy far more than punitive taxes and allowing mass housebuilders to oversupply frequently unsuitable housing in unsuitable locations in a short term economic boost whilst not addressing the long term economic issues.