Is it time for stamp duty reform?

The dream of homeownership remains a cornerstone of British identity, and for many, owning a home signifies stability, security, and the opportunity to build a future. Yet for many aspiring buyers in 2024, that dream feels increasingly out of reach. Ben Thompson, deputy CEO at Mortgage Advice Bureau, explores the current impact stamp duty has on homebuyers, and potential areas for reform.

Related topics:  Blogs,  Mortgages,  Stamp duty
Ben Thompson | Mortgage Advice Bureau
30th May 2024
Ben Thompson MAB
"The impact of SDLT goes beyond the initial purchase, as the tax structure can also discourage movement within the housing market."

The impact of SDLT

A significant factor in this slowly dissipating dream is the Stamp Duty Land Tax (SDLT), a levy on property purchases that can add a substantial financial burden. However, for those unable to shoulder the cost, it becomes an insurmountable barrier.

The current SDLT system doesn’t serve homebuyers, representing a significant hurdle for many homemovers. While it supports new homeowners to an extent, only 33% of all homes in Great Britain have been purchased by first-time buyers this year. Even then, a significant portion of these are in the South of England, and the South East in particular is notoriously expensive.

As the tax applies to all property purchases above £125,000, with rates increasing progressively for more expensive properties, most people would be required to pay SDLT. This can add tens of thousands of pounds to the overall cost of buying a home, especially in areas with higher property values.

SDLT can be a major obstacle to first-time buyers buying a home worth more than £425,000. This disproportionately affects younger generations trying to enter the housing market (especially those living in more expensive regions such as London), and those on lower incomes who may struggle to save enough for a deposit - let alone the additional burden of SDLT.

A broken ladder?

The impact of SDLT goes beyond the initial purchase, as the tax structure can also discourage movement within the housing market. People may be hesitant to sell their current property due to the additional fee that stamp duty incurs. This creates a stagnant market with fewer options for buyers, particularly those looking to upsize as their families grow.

For instance, a couple who bought a starter home a few years ago may now find themselves needing more space. However, they’re now deterred from selling due to the SDLT they would have to pay when buying a larger property. This lack of movement restricts overall market fluidity and reduces choice for buyers across all price ranges.

Spring Budget disappointment

In this year’s Spring Budget, Chancellor of the Exchequer, Jeremy Hunt, announced that the government would be abolishing the Multiple Dwellings Relief (MDR) aspect of SDLT, effective from the 1st June 2024.

MDR abolishment is a step in the right direction in terms of stamp duty reform. However, this is not enough. When the budget was released, it was met with widespread criticism from a lot of experts in the housing industry.

Some criticism given to the government regarding the Spring Budget came from the National Housing Federation, in which they said: “We’re disappointed that this year’s budget was not used as an opportunity to address the housing emergency and chronic shortage of affordable homes across the country.” They also go on to say in their statement that the housing crisis needs a ‘change of approach’ to be solved.

Tom Bill, head of UK residential research at Knight Frank, said this of the budget: “Anyone planning to get on the property ladder would have shrugged their shoulders following this Budget.”

Summer General Election

On 22 May 2024, Rishi Sunak called a General Election to be held on 4th July 2024. This has a lot of ramifications for the housing industry as a whole. The first being that the fallout of the election announcement has led to the Renters’ Reform Bill being shelved.

Housing is likely to be an important battleground for both Labour and Conservatives, and so we should expect to see plenty of new pledges, policy changes, and legislation related to the industry.

It’s important to remember that there is very little room for tax cuts of any description - especially with the Institute for Fiscal Studies (IFS) reporting that the next government will have the hardest fiscal challenge of the past 70 years - getting national debt down. In fact, combatting this may even lead to more tax rises.

SDLT reform is needed

What should be done to reform stamp duty? Here are some potential solutions that the government could take to improve the state of this tax and the housing industry as a whole.

Changes for last-time movers and downsizers

Downsizers, particularly last-time movers, face a significant hurdle in the form of SDLT when trying to move to a smaller property. Waiving or reducing SDLT for last-time movers would incentivize them to downsize, creating a ripple effect that benefits the economy, as more large homes would be available for growing families.

However, concerns exist that this reform could unintentionally pit last-time movers against first time buyers. Careful planning and additional measures, like addressing the scarcity of suitable downsizing options, are crucial to ensure a win-win situation for all parties involved.

Help homeowners go green

The UK's energy-inefficient housing stock is a major hurdle on the road to net zero. A stamp duty rebate for buyers who upgrade a property's energy rating could incentivise both buyers and landlords to make these green improvements. While the initial pressure on landlords may have eased, ongoing collaboration between lenders, the government, and potential buyers through rebates can make eco-friendly renovations more attractive.

Make exemption threshold higher than average house prices

The government should seek to reinstate the exemption threshold above the average house price. This would ensure everyday homebuyers striving for homeownership aren't burdened by this levy, making property ownership a more attainable dream.

Permanent exemption for first-time buyers

A permanent stamp duty exemption for first-time buyers would combat the historic decline in homeownership. This tax burden, coupled with high house prices and deposits, disproportionately impacts young people and first-time buyers who lack the equity of established homeowners. Exempting them from this tax would make homeownership a more realistic aspiration for many.

Reinvesting tax money into the housing industry

Stamp duty revenue could be a key weapon in tackling the UK's housing shortage. Proponents of this approach argue that reinvesting this tax money directly into building new homes in areas of high demand would directly address affordability issues. After all, the government has a target to build 300,000 new homes per year, and recent figures show that 212,570 new homes were built in 2022/23 - well below the expected figure.

The state of play

The dream of homeownership is becoming increasingly out of reach for many Brits due to the burden of stamp duty. While the recent MDR abolishment is a small step, a more comprehensive SDLT reform is necessary. By implementing these potential solutions, the government can ensure SDLT fosters a healthy housing market where homeownership remains a realistic dream for all.

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