Help to Buy is off the table. Stamp duty reform might not be

A long line of economists has argued that Stamp Duty Land Tax (SDLT) distorts the property market in all sorts of ways. By layering a heavy tax on transactions, you discourage moving – people are less likely to downsize or relocate for work, for example.

An influential group of cross-party MPs has joined the chorus: “Stamp Duty Land Tax reduces the affordability of home ownership, slows the property market, and ultimately damages the economy,” the Housing, Communities and Local Government Committee (HCLGC) wrote in a report published yesterday. “While it is a valuable source of revenue for public finances, Stamp Duty Land Tax must not be maintained in its current form and needs to be reformed.”

The recommendation is part of the group’s response to an inquiry launched last summer. Whether it will influence policy is hard to say; Lucy Rigby, Economic Secretary to the Treasury, told the inquiry that her department “keeps all taxes under review, but [abolishing SDLT] is not directly on the agenda.” That said, the government must now respond to the Committee’s recommendations, which elevates the issue from a debate confined to policy papers to a central political theme. Andy Burnham is putting housing affordability at the centre of his campaign (see below), which will only add momentum.

A full replacement

Tax cuts aren’t high on the agenda given the state of the government finances, but experts including Timothy Douglas of Propertymark told the inquiry that cutting SDLT across the board would lead to higher receipts due to an increase in homebuying activity. The Committee is clearly wary of stimulating demand to such a degree that affordability worsens, so it is more likely to push for alternatives. The report gives a nod to France, which has an annualised tax based on a notional rental value instead of SDLT.

Professor Tim Leunig of the think tank Onward proposed a revenue-neutral alternative to both council tax and stamp duty that would replace council tax with a local proportional property tax on homes worth up to £500,000 and replace stamp duty with an annual national levy on house values above £500,000. A recurrent tax of only 0.1% of the underlying land value of dwellings in private ownership would replace the lost revenue of abolishing SDLT, Mitchell Palmer of the Adam Smith Institute told the inquiry.

The Committee said the government’s review should include “a full replacement with a revenue-neutral alternative, a reduction in rates to stimulate transaction numbers, an overhaul of banding thresholds to tie more closely with local property prices… and an update to relief and exemptions so that they better meet the government’s goals.”

Over-committing

The paper is also a useful gauge of the direction of travel on UK housing policy – and it isn't towards a Help to Buy replacement. Incidentally, Chancellor Rachel Reeves was asked the question during a conference organised by the investment bank Peel Hunt yesterday. From the Telegraph:

“If defence is the number one priority, and we live in a dangerous world, that means you can’t make commitments everywhere, because then you end up in the position that previous governments have ended up in, where you over-commit, and then you under-deliver, and you end up with high interest rates,” she said.

The HCLGC paper acknowledged that “while some form of demand-side incentive may be necessary, it would not be appropriate to recreate Help to Buy.” It added that any intervention should “aim to reduce year-on-year variability in homebuilding as opposed to just a short-term fix to increase effective demand.”

Socially optimal

Beyond calls to reform SDLT, there is little in the way of concrete policy recommendations. The report, like the government, wants the private sector to build faster, but acknowledges that build-out rates are constrained by the housebuilders’ “need to remain profitable”.

“When the framework and economic model of private sector homebuilding constrain builders from building at their maximum capacity or at the socially optimal level to maintain their profits, then that framework and model are wrong and must be changed,” the report says. The government is considering ways to address this issue, but there is no detail yet.

The Committee does say that housebuilding targets are only likely to be achieved if councils are able to deliver homes on a meaningful scale. This is likely to form a core plank of Burnham’s policy platform, the FT reported last week. One idea being explored is whether “the UK’s national wealth fund could provide seed funding to new regional banks that would then attract private investment for a huge programme of new subsidised homes,” the paper said. The proposal would include pivoting the government’s existing £39bn affordable housing programme entirely to council housing.

In other news…

Billionaires Fleeing Taxes Flock to Lake Tahoe Haven Across California’s Border (Bloomberg).