The case for scrapping stamp duty

Rachel Reeves used a speech yesterday to lay the groundwork for the first hike in the basic rate of income tax in fifty years – it appears she'd rather break a key manifesto pledge than Britain's self-imposed fiscal rules.

This has been on the cards for months, but it does remove what little uncertainty remained, which is why government borrowing costs and the pound fell. Fiscal responsibility means cheaper borrowing, plus tax rises will subdue inflationary pressures, leading to lower interest rates. 

The timing is interesting, given that the Bank of England will decide whether to cut the base rate tomorrow. The Monetary Policy Committee likes to act in response to data, and an imminent fiscal event provides a disincentive, but the chancellor has given officials a sizable signal of what's to come. The chance of a quarter-point move has risen to a little under 40%, according to money markets.

More deals

Reeves has held off saddling voters with higher tax bills for as long as possible, which is why businesses were hit so heavily during the previous Autumn Budget. The long shadow of those tax increases, alongside speculation as to what lies around the corner, were among several factors that subdued take-up in the London office market during Q3, according to Knight Frank's new London Office Market Report. 

Take-up in Q3 reached 2.7m sq ft, down 23.3% from the previous quarter, 10.0% below the long-term quarterly average. That said, take-up year to date is about a fifth ahead of the same period last year.

The lower volumes in Q3 are due to a lack of larger pre-lets with only two transactions above 70,000 sq ft. Interestingly, there was a higher number of deals signed in Q3 (370) than the previous quarter (361), but the relative lack of large transactions caused the average deal size to fall by 25.2% to 7,324 sq ft.

More opportunities

Lending in the office market has been accelerating during 2025, but the majority is being used for refinancing rather than to finance transactions. A material rise in liquidity will be key to normalising the investment market – that may yet come from investors unwilling to fund the capital expenditure required to boost energy performance ratings, prompting them to sell at deeper discounts, says report author Shabab Qadar.

For now, activity is subdued: investment volumes reached just under £1.6bn in Q3, a 21.8% decline on the previous quarter and a 49.2% shortfall compared to the long-term average. Over the last year, nearly £8.1bn has transacted, which is a 34.7% improvement from the same point in 2024, although still 36.4% below trend.

There are positive signs when it comes to liquidity; there was £3.0bn of assets under offer across London at the end of Q3, a 30.8% jump on the previous quarter and an 82.0% increase against the position a year ago. An increase in deals under offer, more investment opportunities being brought to market, and widening yield spreads should boost investment volumes in the near-term.

The lack of prime deals means prime yields remained stable in Q3, holding steady at 3.75% in the West End and 5.25% in the City and Southbank. Although interest rates have been volatile, the longer-term outlook is for lower risk-free rates, which should help drive more capital back into the London market.

Scrapping SDLT

Many economists hope that Reeves will seize the opportunity to reform UK taxation from top to bottom – tinkering to maintain a wafer thin slice of fiscal headroom is no longer an option, after all.

Are those hopes misplaced? Possibly, but nothing is set in stone so it's still worth highlighting the benefits. The Adam Smith Institute published a new paper this week calling for the abolition of stamp duty on primary residences. Taxes that discourage mutually beneficial trades are almost always a bad idea – people move less because of it, whether for better employment or to 'rightsize'. And despite all the negative impacts, it still raises under £13bn, or 1.32% of total government spending. 

Abolishing stamp duty for owner-occupiers would lead to 349,000 extra housing transactions each year, the paper finds. Assuming the share of new builds of transactions remains stable, 38,000 additional homes might be built each year. Over the Parliament, this represents an additional 152,000 homes – or 10% of the government’s homebuilding target. Construction spending would be increased by £12.9bn a year on average, prompting greater upskilling, capital recycling, and competition in the SME building sector.

Still, it's not fiscally neutral. After all the benefits, the net fiscal cost would be £5.1bn per year on average over the remainder of the Parliament, which could be replaced by a recurrent tax of only 0.1% of the underlying land value of dwellings in private ownership. Across 25 million dwellings, this would average to only £206 per home, though of course it would be much higher for dwellings sitting on valuable land in London and much lower for dwellings sitting on cheap land elsewhere. The tax could be administered through a precept on Council Tax or direct invoicing to landowners.

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