How stamp duty stamps out the labour market

Nigel Williams, 27 June 2013

Stamp duty from residential property provided £4.22 billion for the Exchequer in 2011/12. That is only two thirds of the pre-crash peak and is similar to levels seen in 2004. The regional picture is more varied. London receipts are growing and match those in 2006. Elsewhere in England, the North and the Midlands are declining and are currently at the levels of 2002. The South and East are in decline, Wales is holding steady, Scotland and Northern Ireland are back at late 20th-century receipts.

The peak was artificial, since the house purchases were, to some extent, financed by sub-prime loans. Nevertheless, it is a sign of serious imbalance if only London is demonstating an increase. A tax needs at least to raise revenue in order to justify the disruption to the market economy. One might expect a reduction of takings just prior to a reduction in the rate, as people delay a transaction in order to take advantage. In this case, the reductions have more to do with smothering already-weak demand. It is a tax in need of major review.

Much of the regional variation is caused by differences in capital values. The Land Registry’s House Price Index for April 2013 gave the average price paid for a London property at £375,000. For half the regions of England and Wales, an average house sold below the threhold, £125,000, at which stamp duty becomes payable. Those five regions also saw average prices fall during the year. For the person or family willing to pay £125,000 for somewhere to live, stamp duty begins at 1 per cent of the full value, meaning £1,250.

Someone paying the London average would need to find 3 per cent, which is over £11,000. To the purchaser, the money cannot be recovered. It will not accumulate in the value of the house. It is an immediate £11,000 cost of moving. Other bills arriving at the same time are not the fault of HMRC. Conveyancing, surveys, estate agents’ fees (1 per cent, more or less) and removal expenses make moving house extraordinarily expensive but at least they are subject to competition. In London, the stamp duty alone on an average house purchase represents 5 months of gross median earnings, or 6 months after income tax and national insurance.

One major reason for moving house is to take a new job. Stamp duty makes that option very unattractive. Of the 1.5 million temporary employees in the quarter to April 2013, 600,000 could not find permanent jobs. Anyone moving house to fill a job that may prove temporary risks paying more in stamp duty than they earn from employment.
Stamp duty, therefore, is a tax on those who get on their bike and look for work, especially those that need to look further afield to make use of specialist skills. What are the alternatives?

• First, stamp duty could only be charged when stepping up in property value. Just as businesses are able to net off VAT on sales from VAT on purchases, so house buyers should be allowed to reduce their stamp duty on the house they buy by the duty on the one they sell. At a stroke, this would take the burden off people moving house to change jobs.
• Second, the thresholds should not be cliff-edges. Take the case of a homeowner investing in loft insulation or a ground-source heat-pump and thereby bringing the value up to £250,000. Moving to a similar house would incur an extra £5,000 of stamp duty, which could easily negate the whole investment. As with income tax, the duty should be a percentage of the margin over the threshold, not of the whole sum. The headline, marginal percentage would need to be higher but the effect would be less destructive.
• Third, the tax should be reviewed in conjunction with other property taxes, such as Council Tax and business rates, but that can wait for another week.

A functioning property market needs houses to be put up for sale. A functioning labour market needs workers to be able to move between jobs. Overdue reform of stamp duty will help both.