Did HMG miss a chance to replace the universally disliked tax?
The unanimity with which Stamp Duty Land Tax is regarded negatively is quite remarkable. The Institute for Fiscal Studies calls it a “textbook case of a bad tax”. The London School of Economics has proven it is “suffocating the housing market” and think tanks from the free-market Centre for Policy Studies to the progressive Resolution Foundation agree it is an anti-growth mechanism that traps wealth and penalises economically and socially beneficial mobility. Why have successive governments failed to replace it? Indeed, having fuelled speculation that it was about to do so last November, why did the Treasury blink? The reason is that ‘easy’ alternatives are either money-losers (the treasury needs the £10bn it raises), or vote-losers, or both. Thus SDLT remains, despite outcomes which prompt dismay from the political left and right, and some astonishing numbers. For example:
- The 3% of transactions over £1 million produce 41% of residential SDLT revenue
Historically (pre-2010) the upper tier of the market turned over at around 15% a year, double the average for the rest of the market, driven by executive relocation, downsizing and wealth mobility. Today, it is in line with a much lower market average (barely more than 2% last year, according to our analysis of Land Registry figures). This is the bottleneck highlighted by the LSE. It blocks movement across the whole market and penalises those with growing families and career opportunities who are the engine of the economy.
- 4.8 million home owners aged over 65 live in officially “under-occupied” properties (two or more spare bedrooms)
SDLT is at least as much to blame here as demography. If someone in a large, £1,300,000 house and a family in a £900,000 property, swap homes, the combined tax exceeds 27% of the difference: £108,750. If the swap was between houses at £1,300,000 and £2,200,000 and the purchase of the latter was a second home, the total tax bill would be over 40% of the difference: £361,500. Stamp duty makes it harder for people to live in homes of the right size. It is a major factor tying up 20% of our total housing stock, contributing to our chronic shortage of homes.
- The region with the highest proportion (over 25%) of sales attracting Higher Rate Additional Dwelling tax is the North East
HRAD tax increasing to 5% of the whole price has pushed landlords to the North East, where lower capital values (most investors pay under £125,000) greatly reduce exposure to stamp duty. As a result, first time buyers are competing with landlords and both capital values and rents are increasing. This is a repeat of the structural changes experienced by other regions which successive governments have been trying to reverse.
On what do experts on tax reform agree?
All feasible proposals for replacing SDLT propose an annual tax based on value. A new tax on all home owners is never going to be popular but these could be fair, provide a reliable cash flow (SDLT revenues tend to fall when the Treasury needs them most) and would tax owning, not moving home. Valuing all properties though, is so problematic that, even today, council taxes are based on 1991 valuations. That is one major obstacle. Another is just as politically challenging: if a new annual tax was applied retrospectively, people who had only just moved would pay twice (heavily).
But if it was applied only when they moved, they would still have an incentive to stay put. This dilemma was articulated at a 2025 Treasury Select Committee hearing in which one expert (Prof. Tim Leunig) said “You just have to choose one of those … There is no beautiful answer to that.”
The beautiful answer?
Last year, the Centre for British Progress (which describes itself as a “non-partisan think tank”) proposed a variation on the annual tax concept which aims to overcome the valuation obstacle and give Prof. Leunig his answer. Specifically, in ‘Duty free homes’ it proposes that, when buyers buy, they should have a choice: pay SDLT, or opt for an annual tax. Valuation thus happens automatically and accurately, at no additional cost. Owners would still have a disincentive to move but, crucially, for those who anticipate moving again within, say, a decade, the disincentive is substantially removed. Once adopted, subsequent buyers would not have a choice. Gradual transition could thus reform without hurting tax revenues. This is the proposal which the Treasury all but publicly admitted it was minded to accept. Why did it blink?
Almost certainly because of fear of how it would be spun as a new ‘forever tax’. In fairness, thorough as the Duty Free Homes proposal is, there is plenty of detail worthy of challenge, so the best that could have been done last November might have been to announce a schedule of intent. Even so, to have raised expectations and, so early in a parliamentary session, done nothing, arguably missed the best opportunity in a long time to begin the implementation of greatly needed change.
