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Jun 23, 2017 - price of a property exceeded the threshold for a higher rate of duty, tax would be charged on a 'slab bas
BRIEFING PAPER Number 7050, 23 June 2017

Stamp duty land tax on residential property

By Antony Seely and Matthew Keep

Inside: 1. Reforms to stamp duty land tax 2. Previous debate on the impact of stamp duty 3. Stamp duty land tax statistics

www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | [email protected] | @commonslibrary

Number 7050, 23 June 2017

Contents Summary

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1. 1.1 1.2 1.3 1.4 1.5

Reforms to stamp duty land tax Autumn Statement 2014 Initial reactions The Stamp Duty Land Tax Act 2015 Autumn Statement 2015 Budget 2016

5 5 9 15 23 27

2.

Previous debate on the impact of stamp duty

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3. 3.1 3.2

Stamp duty land tax statistics Receipts Yield and transactions, by band

43 43 43

Cover page image copyright: Victorian Houses, Nottingham!!! by Natesh Ramasamy. Licensed under CC BY 2.0 /image cropped

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Summary Stamp duties are levied on conveyances and transfers of land and property, and on securities (share and bond) transactions. The term comes from the fact that historically stamps on documents, following their presentation to the Stamp Office, indicated payment. Land and property transactions are now charged Stamp Duty Land Tax (SDLT), whereas electronic transfers in securities are charged Stamp Duty Reserve Tax (SDRT). In 2015/16 stamp duties raised £14.0 billion; SDLT accounted for just over three quarters of this total (£10.7 billion). 1 Historically stamp duty land tax (SDLT) has been charged at a single rate on the whole purchase price of a property, with different rates for different value bands. When the sale price of a property exceeded the threshold for a higher rate of duty, tax would be charged on a ‘slab basis’, at the higher rate on the whole value of the sale rather than the part of the price above the threshold. The tax has been charged at the same rate of tax irrespective of the number of residential properties owned by the buyer. Both of these aspects of the tax have been reformed in recent years. First, in his Autumn Statement in December 2014 the then Chancellor George Osborne announced that in future SDLT would be charged on residential property on a ‘slice basis’: rates would only apply to the part of a property’s selling price that fell within each value band. New rates and thresholds would be introduced, with effect from 4 December 2014, to ensure that in removing these distortions, most buyers would not have to pay more tax. In addition, as Mr Osborne explained, “anyone who has exchanged contracts but not completed by midnight [on December 3] will be able to choose whether to pay under the old system or the new, so no one in the middle of moving house will lose out.” 2 It was estimated that this reform would cost £395m in 2014/15, rising to £760m in 2015/16. 3 To give effect to these changes the Government introduced primary legislation: the Stamp Duty Land Tax Act 2015. 4 Second, in his Autumn Statement in December 2015 Mr Osborne announced that from 1 April 2016 new higher rates of SDLT would apply on the purchase of additional residential properties, such as second homes and buy-to-let properties. The Government launched a consultation exercise on how the new rates would apply. In the 2016 Budget the Chancellor announced certain modifications to the Government’s original plans, though the main principle underpinning the new duty regime would remain: the higher rates apply on a purchase if, at the end of the day, the buyer ends up with more than one property, but not if the property purchased is to replace one’s main residence, which is being sold. 5 The new higher rates were forecast to raise £675m in 2016/17, rising to £750m in 2017/18. 6 Mr Osborne also announced that the structure of SDLT on commercial property would be reformed, so that the tax would be charged on a ‘slice basis’, in the same way as 1

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HM Revenue & Customs, UK stamp duty statistics 2015/16, September 2016. HMRC collate statistics on stamp taxes on Gov.uk. HC Deb 3 December 2014 c316. Further details were given in, HM Treasury, Stamp duty reforms on residential property, 3 December 2014. Autumn Statement, Cm 8961, December 2014 pp52-4, p64 (Table 2.1 – item 4). HC Deb 4 December 2014 c427, c476. See also, HMRC, Stamp Duty Land Tax: reform of structure, rates and thresholds, December 2014 HC Deb 16 March 2016 c961. Budget 2016, HC901, March 2016 pp38-9. Budget 2016, HC 901, March 2016 p85, p87 (Table 2.1 – item 44; Table 2.2 – item ad). For guidance on the operation of the 3% higher rate see, HMRC, SDLT: higher rates for purchases of additional residential properties, November 2016.

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residential property. The Chancellor summarised the impact of the new duty regime as follows: “commercial stamp duty will have a zero rate band on purchases up to £150,000, a 2% rate on the next £100,000, and a 5% top rate above £250,000. There will also be a new 2% rate for those high-value leases with a net present value above £5 million … These reforms raise £500 million a year and while 9% will pay more, more than 90% will see their tax bills cut or stay the same.” 7 Provision to give effect to both of these changes to the tax was included in the Finance Act 2016 (specifically s128 and s127 of the Act). Guidance on SDLT is collated on Gov.uk. This includes an online calculator for those who wish to determine how much duty they are liable to pay, on transactions for both residential and commercial property. This paper discusses these reforms to the taxation of residential property, before looking at earlier debates about the way house sales have been taxed. Two other Commons Briefing Papers look at the wider issues of housing need and housing supply. 8

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HC Deb 16 March 2016 cc958-9. see Budget 2016, HC901, March 2016 paras 1.179-83; pp50-1 & SDLT: reform of charging provisions for non-residential property – tax information & impact note, March 2016. Tackling the under-supply of housing in England, CBP7671, 9 June 2017 & Stimulating housing supply: Government initiatives (England), CBP6416, 9 Junel 2017.

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1. Reforms to stamp duty land tax 1.1 Autumn Statement 2014 Historically stamp duty land tax (SDLT) has been charged at a single rate on the whole purchase price of a property, with different rates for different value bands. When the price of a property exceeded the threshold for a higher rate of duty, tax would be charged at the higher rate on the whole value of the sale – the ‘slab’ basis – rather than the part of the price above the threshold – the ‘slice’ basis. The tax has been charged on the ‘slab’ basis for over forty years. 9 In his 2014 Autumn Statement the then Chancellor, George Osborne announced that SDLT on residential property would be charged on a ‘slice’ basis forthwith; the rates of duty would apply only to the part of a property’s selling price that fell within each value band: Stamp duty is charged at a single slab rate on the whole purchase price of a home. It means big jumps in tax when house values tip into a new band … If you buy a property worth £250,000, you pay £2,500 in tax. Buy a house worth just one pound more and you pay over £7,500, three times as much. And in recent years the burden of stamp duty has increased on low and middle income families trying to buy a new home, as prices have risen … So I am today abolishing the residential slab system altogether. In future each rate will only apply to the part of the property price that falls within that band – like income tax. Here are the new marginal rates. You will pay no tax on the first £125,000 paid. Then 2% on the portion up to £250,000. Then 5% up to £925,000. Then 10% up to £1.5 million. Then 12% on everything over that. As a result stamp duty will be cut for the 98% of homebuyers who pay it … The whole reform represents a tax cut of £800 million per year. Only homes that cost just over £937,000 will see their stamp duty bill go up under this system – gradually to start with, rising to more substantial sums for the most expensive homes. A £5 million pound house will see its stamp duty rise from £350,000 to £514,000 – but of course, this is a charge that is only paid once, when the property is bought. I can tell the House that these changes to stamp duty become effective from midnight tonight. Anyone who has exchanged contracts but not completed by midnight will be able to choose whether to pay under the old system or the new, so no one in the middle of moving house will lose out. The changes will apply in Scotland until the Scottish government’s new regime comes into effect next April. 10

The Autumn Statement illustrated the difference between the two rate schedules, as follows: 11

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For the rates of duty over the last fifty years see, HMRC, National Statistics: Rates of stamp duty, September 2012. Statistics on stamp duty receipts are on Gov.uk. HC Deb 3 December 2014 c316. HM Treasury, Chancellor George Osborne's Autumn Statement 2014 speech, 3 December 2014 Autumn Statement, Cm 8961, December 2014 p53

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At the time it was estimated that this reform would cost £395m in 2014/15, rising to £760m in 2015/16. 12 The Autumn Statement set out the Government’s case for amending the tax in this way: that the ‘slab basis’ for charging the tax had distorted the housing market, disadvantaged first-time buyers, and had encouraged tax avoidance: The existing system of SDLT creates distortions in the housing market which can lead to unfair outcomes. SDLT is currently charged at a single rate on the whole purchase price of a property, with different rates for different value bands. This structure means that a disproportionate number of transactions occur just below the value band thresholds and it is unusual for property to be bought or sold at prices just above the threshold levels … For example, many properties are sold at £250,000, where SDLT is paid at a rate of 1% or £2,500, but it is rare for properties to be sold for £251,000, where SDLT would be paid at a rate of 3% or £7,530 … As well as affecting the purchase price of property, the structure of SDLT limits transactions and mobility, and incentivises tax avoidance. As house prices have increased, more transactions have been brought into the scope of the tax and into the higher bands, increasing the upfront costs that buyers have to pay along with the purchase of their home. The government recognises the difficulties this causes, particularly for first-time buyers. 13

To illustrate the impact that the old tax structure had had on house prices, the report presented data on residential property transactions in 2013/14: 14

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op.cit. p64 (Table 2.1 – item 4). Further details on this costing are given in, HM Treasury, Autumn Statement policy costings, December 2014 pp10-11 op.cit. para 1.206-7 op.cit. p52

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Stamp duty land tax on residential property

As the Chancellor noted in his statement, the reforms to UK SDLT applied in Scotland for only a few months. This is because the Scottish Government’s Land and Buildings Transaction Tax replaced SDLT in Scotland from 1 April 2015. Both SDLT and landfill tax were devolved to the Scottish Parliament under the Scotland Act 2012. 15 The Autumn Statement noted that, “the associated reduction in the Scottish Government’s block grant will be around £80 million smaller in 2015/16 as a result of the changes in SDLT.” 16 The table below – published at the time by the Office of Budget Responsibility – shows tax rates and bands under the old UK system, and the two new systems: 17

In his speech Mr Osborne stated that only 2% of residential house sales would see an increase in the amount of tax to be paid as a consequence

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The Act allows both taxes to be ‘turned off’ in Scotland from a designated date. UK SDLT was turned off in Scotland from 1 April 2015 (SI 2015/637). For more details see, The Scotland Act 2012: devolution of tax powers to the Scottish Parliament, Commons Briefing Paper SN5984, 23 January 2015. Autumn Statement, Cm 8961, December 2014 para 1.211 OBR, Economic and fiscal outlook (EFO), Cm 8966, December 2014 p124

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of this reform. The Autumn Statement provides estimates of the impact of the new rate structure across the range of house prices: 18

The potential tax savings rise and fall unevenly over the spread of house prices, reflecting the ‘cliff edges’ of the old system. For houses priced at exactly the value of the thresholds for the 3% rate and 4% rate £250,000 & £500,000 – the new structure left the amount of tax to be paid unchanged. The Office for Budget Responsibility illustrated this, in their analysis of the impact of this reform: 19

18 19

Autumn Statement, Cm 8961, December 2014 p54 EFO, Cm 8966, December 2014 p126

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HM Treasury published a two page guide to the way the new tax structure would be implemented, with details of the transitional arrangements for taxpayers who had exchanged contracts but not completed their sale: The new rules start on 4 December 2014 – but if you’ve already exchanged on a property you’ll have a choice about whether to use the old or new rules. Completing your sale on and after 4 December 2014 If you exchange and complete (or in Scotland, settle) your home purchase on or after 4 December you will pay stamp duty under the new rules. Completed your sale before the 4 December 2014 If you completed on the purchase of your property on or before 3 December 2014, but have not yet filed your stamp duty return, you still have to pay stamp duty under the old rules. Exchanged on your contract before 4 December 2014 If you exchanged contracts (or in Scotland, concluded missives) before 4 December but complete on or after that date you’ll be able to choose whether the old or new rules apply. In the majority of cases you’ll pay less tax under the new rules. 20

1.2 Initial reactions In his response to the Chancellor’s statement, the then Shadow Chancellor, Ed Balls, argued that the Chancellor should have introduced an annual tax on high-value properties, similar to the mansion tax that the Labour Party has proposed: In the Chancellor’s stamp duty reforms, he is accepting that highvalue properties are under-taxed, which is welcome. But rather than taxing them only on sale, why does he not have the courage of his conviction? The average person pays 390 times more in annual council tax as a percentage of their property than the billionaire buyer of a £140 million penthouse in Hyde Park. Why 20

HMT, Stamp duty reforms on residential property, 3 December 2014

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will the Chancellor not have an annual charge on the highest value properties and use that for a £2.5 billion a year investment in the NHS so that we can have 20,000 nurses and 8,000 GPs every year? Why will he not match that commitment? 21

In the Institute for Fiscal Studies’ presentation on the Autumn Statement, IFS director Paul Johnson argued that, “the changes to stamp duty are welcome, but really rather modest”: They are welcome because they remove the absurd slab structure which, at the extreme, could result in a £40,000 additional tax bill accompanying a £1 increase in sale price. They are modest because they leave the system as a whole largely intact, raising large sums of money, and distorting the housing market. Indeed revenues from Stamp Duty on residential property are still expected to increase from £7 billion in 2013-14 to £16 billion in 2019-20. Transaction taxes such as stamp duty are highly inefficient however they are designed and the truth is Stamp Duty will continue to become a more important revenue raiser not a less important one even after these changes. This is most certainly not the substantial overhaul of the taxation of housing we need. It is also worth mentioning that the same slab structure which applies to non-residential property has not been reformed. That seems odd. 22

In his presentation on the changes Mr Osborne had announced to personal taxes and benefits, IFS economist Stuart Adam suggested that “a very bad tax” had been transformed into “a bad tax”; an extract is given below:

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Gains and losses will mostly be felt by properties’ current owners



Property prices rise/fall to reflect change in expected future SDLT



Move away from a ‘slab’ structure is a clear improvement



But why only for residential property?



All the arguments for reform apply to non-residential property too



SDLT still fundamentally flawed: shouldn’t tax transactions at all



Why impose heavier tax on properties that change hands more often?



Assets should be held by the people who value them most



Reduced labour mobility one symptom of this more fundamental problem



SDLT should be replaced with better-designed property taxes. 23

HC Deb 3 December 2014 c320. For more details on the proposal for a ‘mansions tax’ see, Land value taxation, Commons Briefing Paper 6558, 17 November 2014. Generally Members raised other issues following the statement though these changes were welcomed by both Mark Hoban (c334) and John Stevenson (c345). “Introductory remarks: Paul Johnson”, Institute for Fiscal Studies: Autumn statement 2014 briefing, 4 December 2014 p6 “Personal taxes and benefits: Stuart Adam”, Institute for Fiscal Studies: Autumn statement 2014 briefing, 4 December 2014 (slide 6)

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In a press notice the Chartered Institute of Taxation called the reform “great news”: Brian Slater, Chairman of the CIOT’s Property Taxes SubCommittee, said: “This is great news. Buyers, sellers and everyone else involved in property sales should be pleased to see the back of the outdated and unfair ‘slab’ system of SDLT, which distorted property sales by creating huge ‘cliff edges’ at particular property values. Under the current system someone buying a property for £125,000 pays no tax while someone buying a property for £125,001 pays £1,250; someone buying a property for £250,000 pays £2,500 in tax while someone buying a property for £250,001 pays three times as much. That created huge incentives to play the system by claiming exaggerated values for furniture and fittings. A properly progressive rate structure will be both fairer and more sensible, preventing distortions in the market place and avoidance around the ‘break points’. “In the context of the increasing pace of tax devolution it is interesting to see that Westminster has followed Scotland’s lead. The reforms announced today make the tax look very similar to the Land and Buildings Transaction Tax the Scottish Government has just legislated for. Perhaps this will be a trend?” 24

The Tax Faculty of the Institute of Chartered Accountants also warmly welcomed the Chancellor’s announcement: Frank Haskew, ICAEW Head of Tax Faculty, said: “The abolishment of the slab system towards a progressive, income-tax style system is long overdue and good news. This headline measure, along with generally lower rates, should reduce the burden for the vast majority of house sales and could help to encourage the housing market, particularly for first-time buyers.” 25

Both the IFS and the ICAEW gave evidence to the Treasury Committee at this time, as part of the Committee’s inquiry into the Autumn Statement. For its part the Committee welcomed the reform, but questioned why the ‘slab’ system had been retained for commercial property: The Institute for Fiscal Studies described the reformed stamp duty as a "clear improvement", but questioned why changes were not also made to non-residential stamp duty, which retains the old 'slab' structure. Arguing against any sort of transaction tax on properties, they said that residential stamp duty was "a very bad tax transformed into a bad tax." The Institute for Chartered Accountants in England and Wales also welcomed the changes to residential stamp duty, but said that the retention of the slab system for commercial property would "create confusion, uncertainty and potential for arbitrage, particularly given the now higher rates for residential property as compared to commercial property." In its Report Principles of tax policy, the Treasury Committee recommended as its first principle that tax 24

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CIOT press notice, It’s ‘goodbye cliff edges’ as banks pay for house tax shake-up, 3 December 2014 ICAEW (Tax Faculty), ICAEW detailed response to 2014 Autumn Statement, December 2014

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policy should be fair. By imposing thousands of pounds of additional tax liability owing to a penny's difference in a property's price, the old 'slab' structure of residential stamp duty clearly breached this principle. The Committee therefore agrees with the Chancellor and the Institute for Fiscal Studies that the design of residential stamp duty was significantly flawed, and welcomes its reform in the Autumn Statement. However, the unfair and distortionary slab structure continues to apply to stamp duty for non-residential property transactions. The Government should explain the reasons for reforming residential stamp duty in this way but not making a similar reform of non-residential stamp duty. 26

The Financial Times reported that estate agents expected the change to encourage sales of homes that were priced close to the rate thresholds: Lucian Cook, residential research director at estate agency Savills, said buyers of average UK homes outside London would pay “much lower” levels of stamp duty. “In particular, first-time buyers and second-steppers will find it easier to raise the deposit needed to obtain mortgage finance, removing one of the major hurdles in the current market,” he said. London is the only region where more tax receipts will be raised, according to modelling by Savills … Mortgage brokers said the reforms would stimulate sales around the current tax thresholds in particular. Ray Boulger, technical director at broker John Charcol, said as well as encouraging buyers it would attract more houses on to the market around the “cliff edges” of the old system – the points where different rates applied. “If you have got a property worth £260,000 but were going to drop the price to below £250,000 to attract buyers to the lower stamp duty band, you can now put it on at the higher price,” he said. 27

An editorial in the Guardian was supportive of the principle to reforming the rate structure but critical that it came at a substantial Exchequer cost: Taxing transactions, as opposed to capital gains or wealth itself, remains very much a second-best, but raising more money from costly homes while smoothing away the old cliff edges – where a £1 rise in sales prices could trigger thousands in extra duty – are obviously rationalisations to the good. It is, however, in current circumstances perverse to implement the change in a way which fails to bring anything in for the exchequer, and instead pours nearly £1bn a year of scarce public resources into an overheated housing market. 28

By contrast an editorial in the Daily Telegraph argued the reform represented “welcome relief for the vast majority of house purchasers”: Another unexpected bonus was the Chancellor’s overhaul of stamp duty, rightly condemned as the country’s worst-designed tax. We have long called for an end to the iniquities wrought by the way the level of duty was applied to the entire value of a 26 27

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Autumn Statement, 13 February 2015, HC 870 of 2014-15 para 133-4 “Stamp duty reform aims to tackle ‘tax on aspiration’”, Financial Times, 4 December 2014. See also, “Houses over £2m will bear brunt of new stamp duty”, Times, 5 December 2014 “Editorial: He cannot be serious”, Guardian, 3 December 2014

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property rather than just the portion over the threshold. Mr Osborne’s removal of this “slab” approach is a welcome relief for the vast majority of house purchasers. While we may cavil at the introduction of 10 and 12 per cent marginal rates at the higher end of the market, which smacks a bit too much of an alternative mansion tax, at least it is a levy on a one-off purchase rather than on wealth, unlike Labour’s class-envy approach. 29

An editorial in the Times observed this reform would make the system “more progressive”: The best that can be said of Mr Osborne’s statement yesterday, which is far from negligible, is that he is handling prudently the immediate economic task in the approach to a general election. Sweeping reforms to stamp duty on house sales, to make the system more progressive, will cost the exchequer about £800 million a year, but this measure is offset by increased taxes on multinational companies and banks. That should be electorally beneficial while still representing a slight fiscal tightening. It will be significantly more expensive to buy a property at the top end of the market — while not being a mansion tax, as Labour proposes, which would introduce distortions. What it does not do is resolve Britain’s housing crisis, which requires more supply. 30

In the Financial Times, Stephanie Flanders observed that this “might look like the right priority to a politically shrewd chancellor [but] to any economist it looks rather odd”: Another area where Mr Osborne was right: stamp duty is a bad tax that has long been in need of radical reform. One of the many bad things about it was its “slabbed” design. So the new system will be better in design. But that is where the positives end. Britain needs a more sensible way to tax land – more than ever, at a time when the Office for Budget Responsibility expects tax revenues overall to be £20bn lower in three years’ time than it was expecting only six months ago. The chancellor has not taken the country any closer to that goal with this Autumn Statement. Even a reformed stamp duty regime is still only a tax on property transactions. From an economic standpoint it is no replacement for an annual levy on the value of property itself. The OBR forecasts show that the policy changes announced on Wednesday have increased borrowing in 2015-16 by £1bn, over and above the impact of lower than expected tax revenues. Put it another way: the chancellor has decided to spend £1bn next year that he does not actually have, and he has chosen to spend almost three-quarters of that on lowering the tax that most people pay when they buy a house. That might look like the right priority to a politically shrewd chancellor. To any economist it looks rather odd. 31

Writing in the paper, John McDermott noted that the large disparities in house prices between central London and the rest of the country had enabled the Chancellor to reform the tax at relatively little cost: 29

30 31

“Editorial: George Osborne has given Britain a clear choice for 2015”, Daily Telegraph, 4 December 2014 “Leader: Lucky George”, Times, 4 December 2014 “Autumn Statement 2014: A mixed bag from the chancellor”, Financial Times, 3 December 2014

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The obstacle to reform has been that any change that doesn’t lead to a reduction in revenues is hard to achieve without some people losing money. The chancellor has ignored the first of those problems. His policy will cost about £800m per year from 2015/16, according to the Treasury’s policy costings document. We can chalk this down as another tax cut during a time when these are hard to afford. The rise in house prices in London, together with who has been buying those properties, has also made it easier to change the tax without having a lot of people lose out. Stamp duty revenues in Kensington & Chelsea have been higher than in Scotland, Wales and Northern Ireland combined, according to HMRC figures. The size of the prime London take means that only a fraction of would-be buyers will now be worse off after the changes announced today by George Osborne – 2 per cent, according to Treasury estimates. These buyers will mostly be in London … Labour and the Liberal Democrats have both proposed a so-called “mansion tax”. The chancellor may have felt politically exposed. His changes will annoy some of his future neighbours in Notting Hill but will be broadly popular. And remember that about half of property sales worth more than £1m in central London are to foreign nationals. The chancellor is improving an inefficient tax in a way that defends himself from political attacks, helps the average housebuyer and hurts a relatively small number of rich people, many of whom aren’t UK voters. These opportunities don’t come along very often – and the chancellor is canny enough to take them. 32

There was also some discussion as to whether any potential tax saving by buyers of properties below £1m would simply lead to higher prices. The Guardian quoted Professor Michael Ben-Gad of City University as saying, “The short-run impact is likely to be a rise in house prices, because the immediate supply of housing is inelastic and sellers will pocket most of the tax reduction.” 33 In their analysis of HMRC’s costing of this change the OBR noted, “the immediate reforms to stamp duty land tax announced in the Autumn Statement are likely to have significant effects on the UK housing market. The main effect is likely to be distributional – house prices and transactions will be lifted at lower prices (where the effective tax rate has been reduced) and will be depressed at higher prices (where the effective tax rate has risen).”34 The OBR also noted that, “as with any policy changes that are expected to generate behavioural responses, these estimates are subject to considerable uncertainty. But we consider these estimates to be reasonable and central, so we have certified the Government’s costing and included the effects in our forecast.” 35

32 33

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“The prime London property tax”, Financial Times, 3 December 2014 “Stamp duty change shows Osborne is addicted to rising house prices”, Guardian, 3 December 2014 EFO, Cm 8966, December 2014 p221, para A.16 op.cit. p127

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1.3 The Stamp Duty Land Tax Act 2015 HM Revenue & Customs set out details of how the Government’s SDLT reform would be implemented in a tax information note published alongside the Autumn Statement: This measure will have effect on and after 4 December 2014. Where contracts have been exchanged but transactions have not completed on or before 3 December 2014, purchasers will have a choice of whether the old or new structure and rates apply. This measure will apply in Scotland until 1 April 2015, when SDLT is devolved. Current law The main SDLT legislation is in Part 4 Finance Act 2003. Section 55 provides for the amount of tax chargeable and sets out separate tables of rates for purchases of residential and nonresidential (or mixed residential and non-residential) property. Section 56 and Schedule 5 Finance Act 2003 provide for a separate SDLT charge on the net present value of the rent payable under a new lease. Proposed revisions A Bill will be introduced in December 2014 to amend section 55, to provide for a new method of calculating the amount of tax due in respect of transactions to which Table A (residential property) applies and to amend the tax rates and thresholds set out in Table A. The changes will have effect on and after 4 December 2014 by virtue of a resolution under the Provisional Collection of Taxes Act 1968. There will be no changes in respect of transactions to which Table B (non-residential and “mixed” property) applies, or to the Schedule 5 charge on the net present value of rent. 36

At the time the Treasury gave some details as to why these changes were brought in immediately by means of a separate Bill, rather than being included in the next year’s Finance Bill after consultation: Why is the Government not consulting on this change? Fast implementation of these reforms was essential. The Government decided to introduce these reforms with immediate effect in order to prevent any distortion in the housing market that would have resulted from a consultation period. The legislation and Bill will receive full scrutiny in Parliament. Why a stand-alone Bill instead of the Finance Bill? A standalone Parliamentary Bill is necessary in order to bring in the change from the 4 December and avoid any distortion of the housing market that that would have resulted from an extended consultation period. 37

To give immediate effect to these tax changes, following the Chancellor’s statement the Government moved a Provisional Collection of Taxes Motion. 38 This was debated and approved the following day. 39 On this occasion Treasury Minister David Gauke argued, “this is a

36 37 38

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HMRC, SDLT: reform of structure, rates and threshold, 3 December 2014 Email correspondence with HM Treasury, 3 December 2014 HC Deb 3 December 2014 cc349-52. For an explanation of this procedure see, The Budget and the annual Finance Bill, Commons Briefing Paper 813, 13 April 2017. HC Deb 4 December 2014 cc450-476

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principled reform that exemplifies the Government’s commitment to a fairer and more efficient tax system”: The previous SDLT regime created distortions in the housing market, imposed perverse incentives and made it harder to get on and move up the property ladder, or indeed move down the property ladder for those wishing to downsize. This major and, as some have argued, overdue reform demonstrates that even in the past six months of this Parliament, we are a Government who are continuing to make radical change for the benefit of the British people. 40

The Minister gave some details as to how HMRC had been giving advice on the implications of these changes, before going on to contrast it with the proposals that had been made by the Opposition for an annual tax on residential property worth £2m or more: We realise that this is a big change, even for those who will benefit at such a significant moment in their lives. We have ensured that the changes have been properly explained. Her Majesty’s Revenue and Customs has produced full guidance on the Government website, including a calculator that compares the old and the new systems. As of 9 am this morning, that calculator had been used almost 500,000 times, with no significant delays reported, showing the level of interest in this reform among the public. Critically, HMRC’s specialist call centre was manned until midnight last night when the changes took effect, and is open now. HMRC specialists responded to around 250 inquiries by telephone and all but 3% were resolved immediately, and the remaining handful are being followed up … The point I would make [regarding a ‘mansions tax’] … is that it is better to collect this tax at the point at which people are entering into transactions, the revenue is available, and there are not the same cash-flow difficulties and problems with the asset-rich cash poor … Labour says that more money should be raised from properties worth more than £2 million. In 2015-16, this measure will raise more than £300 million from such properties. Obviously, that is a useful sum for the Exchequer, but if the view is that Labour wants to raise £1.2 billion from the mansion tax on those properties, will it drop that figure down to £900 million? 41

Mr Gauke went on to give more details as to why the Government had decided to introduce these changes with immediate effect: First, it was important to act quickly, because reform to SDLT was long overdue. Usually, the measures would have formed part of the annual Finance Bill following a Budget, which is why the stand-alone Bill I am introducing today is premised on the same financial motions as those that would follow a Budget. The first motion, which the Chancellor moved yesterday at the end of his statement, gave effect to the changes from midnight. That was important to give people certainty and to avoid forestalling. Secondly, hon. Members will understand that the measure was subject to strict confidentiality. Given the potential impacts on the housing market of a tax change of this significance, it was right that the measure was announced first by the Chancellor to the House. We ensured that the motion passed yesterday was available in the Vote Office immediately as the Chancellor sat 40 41

op.cit. c459 op.cit. cc459-60

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down after his main speech and then voted on at the end of questions and answers. The motion is effectively the Bill I hope to introduce in a few moments. 42

Speaking for the Opposition Shabana Mahmood described the reform as “a sensible measure” which the Opposition would support: Many Members from all parties, housing specialists and commentators have long complained about the structure of stamp duty. The Institute for Fiscal Studies, the Mirrlees reviews and others all agreed that the tax was badly designed. Furthermore, it has undoubtedly been an increasing burden on buyers. From 1997 to 2005, house price inflation averaged more than 10% a year, and the proportion of property transactions attracting stamp duty rose from about half to more than three quarters over roughly the same period. Measures to alleviate the burden focused primarily on thresholds and stamp duty holidays: the threshold was doubled in 2005; temporarily increased by £50,000 for one year in 2008; and doubled again for first-time buyers for three years from March 2010. Stamp duty has continued to be a significant burden, however. It has increased by 30% between 2009-10 and 2013-14. We have seen continued growth in the housing market and more people have been brought within the higher tax bracket, all of which have increased the burden significantly … We believe that the proposed changes to stamp duty represent a sensible measure, and they will have our support today and next week when the proposed legislation is formally brought forward. 43

The other Members who spoke in the debate strongly supported these reforms. 44 In her speech Ms Mahmood argued that the Government should reconsider the case for an annual tax on housing wealth: It is interesting that the Chancellor has accepted, in his stamp duty proposals, the principle that very high-value properties in this country are under-taxed. Earlier in this Parliament, he introduced the annual tax on envelope dwellings—the ATED—which is described as a kind of mansion tax for high-value properties held by companies in a corporate envelope. Now, the Government are characterising the new stamp duty changes as their version of a mansion tax. I wonder why, as they creep towards an actual mansion tax, they will not make that final leap and simply adopt our proposal … Stamp duty is a transaction tax, but our tax on high-value properties would be an annual charge that would provide a stable source of revenue for the National Health Service. One of the Government’s regular criticisms of our proposal is that it would hit those who were asset rich but income poor. However, we have already set out how that could be dealt with through a system of deferral for anyone with an income of less than £42,000 a year—

42 43 44

HC Deb 4 December 2014 cc460-1 op.cit. c462, c464 specifically, Anne Main (c465), Mark Reckless (c467), Ian Swales (c469), Marcus Jones (c470) & Dominic Raab (c472).

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in other words, a basic rate taxpayer. That would be a perfectly sensible and adequate way of helping those people. 45

Ms Mahmood also asked why the Government had decided to leave non-residential sales unaffected, and how these changes were expected to affect house prices: The reforms to SDLT apply only to residential properties; the previous stamp duty system—the so-called slab system—remains in place for commercial properties. Beyond mere electioneering, what is the Government’s reason for focusing the proposals on the residential market? … As the Minister will be aware, the OBR’s assessment accompanying the autumn statement states that house prices will continue to rise faster than incomes, which will risk pushing home ownership further out of reach for many people. Will he share with us the Treasury’s assessment and modelling in relation to the stamp duty changes and the impact on home ownership and prices? 46

In response, the Minister acknowledged the “warm support” from Members for the reform, and addressed some of the questions raised – first, over the decision to leave the duty rate structure unchanged for non-residential property, and the likely impact on house prices: The hon. Member for Birmingham, Ladywood (Shabana Mahmood) asked why we are not reforming non-residential SDLT at the same time. The argument I would make is that the market for non-residential property is very different, and the urgency for change is not the same, so I think that a different case needs to be made in that regard. We are not persuaded by the need to change that at present … The hon. Lady also asked about the impact on the housing market. As I have said, our reforms will change the amount of SDLT due for the majority of homes, leading to a cut in the cost of moving home in the vast majority of cases. That will have a small impact on house prices overall, although the size of that effect is expected to be lower than the usual fluctuations in the housing market caused by many factors that occur year on year. I am not denying that there will be an effect, but there are many factors that come into play when it comes to house prices. 47

During the debate Members had asked why this reform had not been made in a revenue-neutral fashion, and what plans the Government had to uprate duty rate thresholds in future. In answer to these points Mr Gauke said: It would have been very difficult to make these changes without some cost to the Exchequer in terms of forgone revenue. That might answer the question, “Why do this now?” As a consequence of other measures brought forward in the autumn statement, we can afford to fund these reforms, and it is right that we took that opportunity ... On future uprating … we have set out the bands. We have not set out plans for indexation or

45 46 47

op.cit. cc463-4 op.cit. c461 op.cit. cc474-5

19 Stamp duty land tax on residential property

future uprating, but future Governments will clearly wish to return to that in the long term. 48

The Bill was given a Second Reading on 10 December. 49 Introducing the Bill Treasury Minister David Gauke addressed the question of the likely impact on the number of house sales: The problem with the previous system was simple. The slab approach created an enormous hike in taxes at certain thresholds. If someone paid £250,000 for a house, they would pay £2,500 in stamp duty. If they paid £250,001, however, they would pay £7,500—three times as much. In reality, of course, nobody did; they would have been crazy to. What happened was that there were dead zones—in this case a little above £250,000—in which almost no transactions actually took place. … This change is likely to result in a substantial increase in the number of transactions in those dead zones because of the ending of the bunching effect, which should help us to have a more efficient market … Given that the average UK house price is around £275,000, this was a big distortion affecting a significant number of properties. What also happened was that people owning properties a little under the threshold were reluctant to improve them for fear that that would be money thrown away if they came to put the property on the market. Also, people wishing to move up the property ladder as their families grew, but who found themselves on the wrong side of the step upwards, had to find a significant— and arbitrarily imposed—lump sum precisely at a time when there are hundreds of other one-off expenses to worry about. We have got rid of the inefficient and distortive old system, and replaced it with a fairer new system that cuts SDLT for 98% of people who pay it. 50

Mr Gauke was also asked about the likelihood of extending the new tax structure to commercial property. In response he said, “no doubt commercial property and SDLT is a matter to which the Government will wish to return in the future.” 51 Subsequently, in its response to the Treasury Committee’s report on the Autumn Statement, the Government reiterated this point: The Government believes that the market for non-residential property is very different from the market for residential property. For example, non-residential properties have a higher value on average. Furthermore, non-residential property has been treated differently to residential property for SDLT purposes since 2003. For these reasons the Government does not feel it appropriate to make changes to SDLT on non-residential properties at this time. 52

Turning back to the Bill’s second reading, on this occasion Ms Mahmood gave the Opposition view that the reform was “reasonable and sensible”, and asked about the numbers of taxpayers who would be covered by the transitional arrangements. In response the then Exchequer Secretary, Priti Patel, said, “the Government do not have the current figures on how many home buyers have benefited from the 48 49 50 51 52

op.cit. cc475-6. The motion was approved without a division. HC Deb 10 December 2014 cc908-921 op.cit. c909 op.cit. c913 Sixth special report, 27 March 2015, HC 1151 of 2014-15 pp9-10

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transitional reviews. As with most cases where stamp duty is paid, we get the information only after a transaction has been fully completed. However, we expect that as many as 35,000 transactions will benefit from the transitional rules, which is a substantial number.” 53 The debate was relatively short as only two other Members made speeches, and the Bill was given a second reading without a division. 54 The Bill’s remaining stages in the Commons were completed on 12 January 2015. 55 On this occasion the Financial Secretary, Mr Gauke, gave a longer answer to the question of extending the new regime to commercial property: The market for non-residential property is very different from the market for residential property. For example, non-residential properties have a higher value on average and many are held on market rent leases granted for a small or no premium. At this time, the Government do not feel it appropriate to make changes to non-residential SDLT … It is worth pointing out that if we were to have exactly the same regime applied [to non-residential property] … approximately 40% of tax-paying non-residential transactions would pay more. That would not be terribly attractive for businesses. If we examine the costings of such a move on a purely static basis … by which I mean there is no behavioural change, we find that a switch to an identical system for commercial property would be a substantial revenue raiser. It would raise about £3.6 billion, but that represents a substantial increase in the burden of SDLT on business and we do not believe it would be advisable. That is one reason why we have not gone down that route. 56

Speaking for the Opposition Ms Mahmood asked about the revenue impact of this change, noting that, “research by Lonres and Dataloft has found that more homes changed hands on the day of the autumn statement than on any other day in the past decade, so one in six of all homes sold in London’s most expensive areas in the last three months of the year changed hands on 3 December.” 57 Ms Mahmood also noted that while the new rates for residential property would apply to property in Scotland initially, from April 2015 the new Scottish land and buildings transaction tax would come in, “which will apply to both residential and commercial properties. Have the Minister and the Treasury considered whether there is a risk that England might be disadvantaged, particularly in relation to business mobility?” 58 Ian Swales also asked about the Government’s costing: “I would have thought that the taxation of a fixed asset transfer like this, with the certainty that that implies, would mean this is a very low risk method of changing a tax system, but if the OBR regards it as medium to high risk, 53 54 55

56 57 58

HC Deb 10 December 2014 c916, c919 Anne Main (c916) and Ian Swales (c918), who both supported this reform. HC Deb 12 January 2015 cc611-624. No amendments were tabled, and the Bill was agreed without a vote. The Stamp Duty Land Tax Act 2015 received Royal Assent on 12 February 2015. HC Deb 12 January 2015 c614, cc619-20 op.cit. c615 op.cit. c616

21 Stamp duty land tax on residential property

and if the right hon. Gentleman is suggesting there may be more complex effects that I have not understood, I would like the Minister to clarify whether I am missing something.” 59 In response to these points Mr Gauke said the following: The hon. Lady asked whether the continuation of a slab structure for non-residential property could result in damage to business mobility. I make the point, of course, that the Government keep all taxes under review. Businesses incur costs from all manner of sources, of which SDLT is just one. The rates of SDLT in England and the land and buildings transaction tax in Scotland will differ owing to the natural consequences of devolution. It is unlikely that many businesses will move from England to Scotland, or vice versa, just because of changes in the SDLT or LBTT regimes … The challenge for the OBR and the reason why it has rated this as a medium to high risk is that there will always be a degree of uncertainty over the behavioural response. Will people be much more inclined to move property as a consequence of these changes? A number of assumptions are made. We believe that the costings are robust, sensible and essential. 60

Following the Chancellor’s statement, there was some mention of the fact that, with the introduction of the Scottish LBTT regimes, properties in a certain price range would become liable to a higher rate of stamp duty. 61 On 21 January 2015, when he presented the Scottish Government’s budget for 2015/16 to the Scottish Parliament, Finance Minister John Swinney, announced a revised rate structure for LBTT to apply from 1 April 2015: One consequence of the chancellor’s announcement in December is that the amount of revenue that I need to raise to meet the commitment to revenue neutrality is lower than was anticipated at the time of the draft budget. As a result, I have chosen to review the rates and bands for residential land and buildings transaction tax … With effect from 1 April 2015, to provide further support for first-time buyers, the threshold for beginning to pay tax will be increased to £145,000, which will take 50 per cent of transactions, or another 5,000 homes, out of tax altogether. A marginal rate of 2 per cent will apply to transactions of between £145,000 and £250,000. To restore the benefit of my proposals to those who buy properties up to the value of £330,000, I will introduce an additional marginal rate of 5 per cent for transactions of between £250,000 and £325,000. For those between £325,000 and £750,000, the marginal rate will be 10 per cent. In order to ensure that we are able to provide benefits for those at the bottom of the market while retaining the principle of proportionality, the top marginal rate of 12 per cent will now affect all transactions above £750,000 … In October, I estimated that the taxes would bring in £558 million. The block grant adjustment has been agreed at £494 million, so the [cost of these rate changes] is the difference between those two numbers. 59 60 61

op.cit. c617 op.cit. c620

For example, “Scots to be charged double English rate for buying house”, Daily Telegraph, 3 December 2014

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I will bring orders before the Parliament to set the rates of land and buildings transaction tax that I have outlined, and I can confirm that I will bring forward orders to set the rates of nonresidential land and buildings transaction tax and Scottish landfill tax at the rates that I announced back in October. 62

In a press notice the Chartered Institute of Taxation suggested that this announcement showed that “political and economic competition across the border is now an increasingly visible fact of life.” 63 In 2014-15 the Treasury Committee held a number of evidence sessions on further fiscal and economic devolution in Scotland, following the referendum, and the establishment of the Smith Commission. 64 After the publication of the Commission’s report, on 20 January 2015 the Committee took evidence from the Chancellor and Sir Nicholas Macpherson, Permanent Secretary at the Treasury. On this occasion, David Ruffley asked Mr Osborne, “do you think the devolution of tax rates and bands is going to lead to tax competition?” In his reply the Chancellor referred to the Scottish Government’s decision to amend the rates of the new Scottish Land & Buildings Tax: Ultimately, it is a decision primarily for the Scottish Parliament and the Scottish Government whether they wish to pursue that or not. I think it is quite interesting that—if I may make an observation— off the back of the changes to stamp duty that we announced in the autumn statement the Scottish Government said that they would revisit their proposals on stamp duty. You could argue that that is a bit of tax competition in action. 65

Subsequently, in their report on the Autumn Statement, the Committee noted “how fiscal devolution can lead one government to alter tax policy in response to the decisions of the other. With further fiscal devolution to Scotland, this is likely to be more common.” 66 Following the passage of the legislation to implement the reforms to SDLT, the issue has gathered much less attention. In its Green Budget in February 2015, the IFS considered options for raising tax, and, as part of this, two “temptations to resist” – further restrictions to tax relief on pension contributions, and, increasing SDLT: Reforms adopted for Scotland in the Land and Buildings Transaction Tax (Scotland) Act 2013 and for England in the 2014 Autumn Statement have removed the most obviously anomalous feature of SDLT for housing, whereby a £1 higher purchase price could be associated with a tax bill thousands of pounds higher. (This anomaly remains in place for non-residential property in England and Wales.) Yet the more fundamental problem with SDLT remains. One of the most basic tenets of the economics of taxation is that transactions taxes should be avoided. Assets should be held by the 62 63

64

65

66

SP OR 21 January 2015 cc20-21 CIOT press notice, Scottish property taxes changes highlight move of dynamic tax environment, 21 January 2015 For further discussion of this issue see, Devolution of financial powers to the Scottish Parliament: recent developments, Commons Briefing Paper 7077, 1 March 2016. Treasury Committee, Oral evidence: Proposals For Further Fiscal and Economic Devolution to Scotland, HC 760, 20 January 2015 p8, Q248. Autumn Statement, 13 February 2015, HC 870 of 2014-15 para 135

23 Stamp duty land tax on residential property

people who value them most; the effect of a transactions tax such as SDLT is to discourage mutually beneficial transactions, so that properties are not held by the people who value them most. If a family in a small house want to move to a larger one (because they are having children, for example) while a neighbouring family in a large house want to move to a smaller one (perhaps because their children have grown up and left home), SDLT might discourage them from buying each other’s houses, leaving both families worse off. At a macroeconomic level, one manifestation of this is to reduce labour mobility, as people are discouraged from moving to where suitable jobs are available. 67

More recently IFS director Paul Johnson reiterated the case against SDLT on homes in an opinion piece for the Times in November 2016: Far from phasing it out successive governments have raised [SDLT], raised it, and raised it again. And you can sort of see why. You’re buying a house, you’re already spending more than you’ve ever spent before. What’s a few per cent extra in tax when you’re shelling out half a million quid? That might explain the politics, but it doesn’t change the economics. One of the most basic tenets of the economics of taxation is that transactions taxes should be avoided. There is no reason to impose a heavier tax charge on those properties that change hands more often. That’s because, in theory, assets should be held by the people who value them most. But transactions taxes such as stamp duty mean that doesn’t happen. If a family in a small house want to move to a larger one (because they are having children, for example) while a neighbouring family in a large house want to move to a smaller one (perhaps because their children have grown up and left home), stamp duty will discourage them from buying each other’s houses, leaving both families worse off. What that means is that fewer houses are bought and sold, people find it harder to move to where the jobs are, young families struggle to trade up, and older people are forced to hold tight to bigger properties they might prefer to leave, because it costs so much to move. 68

1.4 Autumn Statement 2015 In the Autumn Statement on 25 November 2015, the then Chancellor George Osborne argued that one of the Government’s priorities was to boost home ownership: “spending reviews like this come down to choices about what your priorities are. I am clear: in this spending review, we choose … to build the homes that people can buy, for there is a growing crisis of home ownership in our country.” Mr Osborne announced a series of measures to tackle this problem, including a new higher rate of stamp duty on the sale of additional residential properties, to relieve the pressure of the buy-to-let sector on the housing market as a whole: The fifth part of our housing plan addresses the fact that more and more homes are being bought as buy-to-lets or second homes. Many of them are cash purchases that are not affected by 67

68

“Chapter 10: Options for increasing tax”, The IFS Green Budget, February 2015 p259 “Stamp duty is an economic nonsense”, Times, 22 November 2016

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the restrictions I introduced in the Budget on mortgage interest relief, and many of them are bought by those who are not resident in this country. Frankly, people buying a home to let should not squeeze out families who cannot afford a home to buy. So I am introducing new rates of stamp duty that will be 3% higher on the purchase of additional properties, such as buy-tolets and second homes. It will be introduced from April next year and we will consult on the details so that corporate property development is not affected. This extra stamp duty raises almost £1 billion by 2021, and we will reinvest some of that money in local communities in London and places like Cornwall, which are being priced out of home ownership. The funds we raise will help build the new homes. 69

The Chancellor’s plans to consult on the new duty rates were confirmed in the Autumn Statement: 3.70 Stamp duty land tax: additional properties – Higher rates of SDLT will be charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes, from 1 April 2016. The higher rates will be 3 percentage points above the current SDLT rates. The higher rates will not apply to purchases of caravans, mobile homes or houseboats, or to corporates or funds making significant investments in residential property given the role of this investment in supporting the government’s housing agenda. The government will consult on the policy detail, including on whether an exemption for corporates and funds owning more than 15 residential properties is appropriate. The government will use some of the additional tax collected to provide £60 million for communities in England where the impact of second homes is particularly acute. 70

This consultation was launched on 28 December, and closed on 1 February 2016; full details are collated on Gov.uk. The consultation paper set out how the new higher rates of duty would apply in practice: 2.2 When the higher rates will apply The higher rates will not apply if at the end of the day of the transaction an individual owns only one residential property, irrespective of the intended use of the property ... If the purchaser has sold a previous main residence within 18 months before the day of the transaction and the transaction is a purchase of a new main residence, the purchaser will be considered to be replacing a main residence. Where an individual is replacing a main residence the higher rates of SDLT will not apply. However, if the purchaser is not replacing a main residence (either because they have not sold a previous main residence within the last 18 months or the property being acquired is not a new main residence), the higher rates will apply. 69

70

HC Deb 25 November 2015 cc1371-2. For details of the change to mortgage tax relief that Mr Osborne mentioned, see, Summer Budget 2015, HC264, July 2015 para 1.190-3, and, HMRC, Restricting finance cost relief for individual landlords, 8 July 2015. Spending Review & Autumn Statement, Cm 9162, November 2015 p121

25 Stamp duty land tax on residential property

Recognising that there may be certain circumstances where purchasers may end up in difficult circumstances, some purchasers will be eligible for a refund of the additional SDLT paid …

The paper gave a number of examples of how the higher rates would, or would not apply, in certain circumstances – two examples are reproduced below: Example 7: A owns both a main residence and a second home. She sells her main residence and purchases a new one. Although she has two properties at the end of the day of the transaction, she has replaced her main residence so the higher rates will not apply ... Example 10: O is a buy-to-let investor with 10 residential properties in his portfolio. He also owns one residential property which he uses as his main residence. He decides to sell his previous main residence and purchase a new main residence. At the end of the day of the transaction, he owns 11 properties – his new main residence and his 10 buy-to-let properties. However, as he has replaced his main residence he will not pay the higher rates of SDLT.

It went on to discuss how the higher rates would apply where there was a gap between the original sale of a main residence, and the purchase of its replacement: 2.9 Delay between sale of a previous main residence and purchase of a new one The government appreciates there may be circumstances where an individual sells a property which was their only or main residence, but there is then a period before they purchase their new main residence. The government does not want to disadvantage people in those circumstances. The government believes that there should be a maximum 18 month period between sale of a previous main residence and purchase of a new main residence for the purpose of determining whether the

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higher rates apply. The government is of the view that this is a sufficient period in the vast majority of cases. 71

As noted, the Government proposed a tax refund scheme; individuals who bought a new home but did not immediately sell their existing one would be able to reclaim the extra tax charged if they sold that first home within 18 months. 72 In the consultation document the Government also asked for views on how ‘large scale investors’ might be exempted from the new rates of duty. 73 Most comment on the Autumn Statement focused on other aspects of the Chancellor’s statement, such as his decision to reverse changes to the taper rate and income thresholds within tax credits that he had announced several months before in the Summer Budget. 74 The Chartered Institute of Taxation noted that this would significantly increase the costs of ‘buy to let’ investment, taken with the decision in the Summer Budget to introduce a phased restriction on tax relief for financing costs incurred by landlords. 75 Subsequently the CIOT made representation that the Government should consider an exemption for joint purchases that had “a clear social value and not a bid to set up a buy-to-let business”, where parents were actively supporting their adult children in buying a home but needed to retain an equity investment in that property themselves. 76 In his commentary on the Autumn Statement, Paul Johnson underlined that this measure represented a substantial tax increase - nearly £1 billion on second homes and buy to let properties – and one that was “ill designed, not least because it reintroduces, albeit on a small scale, a cliff edge into the Stamp Duty schedule a mere year after the Chancellor made much of abolishing cliff edges in the Stamp Duty schedule.” 77 The Financial Times reported that landlords and financial advisors who had been assessing the impact of this measure thought it “was likely to have a chilling effect on the amateur end of the market” Dominic Field, a director at buying agent Temple Field Property, said this would be a positive step amid increasing number of buyto-let mortgage applications. ‘It will take the forth out of it’, he said. ‘Those people who are flying a kite and have no serious commitment to or experience of buy-to-let will leave the market. 78

The month after the Chancellor’s statement, John Swinney, Deputy First Minister, presented the Scottish Government’s draft 2016/17 Budget, 71

72 73 74

75

76

77

78

HM Treasury, Higher rates of Stamp Duty Land Tax (SDLT) on purchases of additional residential properties, December 2015 para 2.2, para 2.9 op.cit. para 2.11 op.cit. para 2.19 see, Spending Review and Autumn Statement 2015: a summary, CBP7401, 30 November 2015. Chris Philp MP was the one Member who raised this when the Chancellor took questions on his Statement (HC Deb 25 November 2015 c1390). CIOT press notice, Stamp Duty increases will hike 'buy to let' costs significantly, 25 November 2015. For details of the second of these measures see, HMRC, Restricting finance cost relief for individual landlords, 8 July 2015. CIOT press notice, Tax experts urge carve out from stamp duty hike for parents helping their children become first time buyers, 1 February 2016 “Paul Johnson’s opening remarks”, IFS Post Autumn Statement briefing, 26 November 2015 “Stamp duty switch may hit house prices”, Financial Times, 28 November 2016

27 Stamp duty land tax on residential property

and as part of this, announced that the Scottish Government would also introduce a supplementary charge on the purchase of second homes, set at “3 per cent of the total purchase price, payable in addition to the existing LBTT charge.” 79 The Scottish Government introduced legislation in January 2016, and the ‘additional dwelling supplement’ to Scotland’s Land & Building Transactions Tax came into effect from 1 April 2016. 80 In its report on the Autumn Statement the Treasury Committee raised concerns as to the likely impact of this reform on the private rented sector, and recommended that the system for taxing property should be reconsidered: The stamp duty surcharge is likely to reduce the supply of privately rented properties, and hence result in higher rents. Were it not to do so, it could not be claimed to support home ownership. Combined with other measures in the Summer Budget and Autumn Statement, particularly the reduction in tax reliefs available on mortgage interest payments, the profitability of buyto-let investments will be sharply reduced. The uncertainty about how far the Government is prepared to go to discourage buy-tolet may act as a further deterrent to investment in this sector, and with it, act as an enduring constraint on the supply of privately rented properties. Were the measures taken to curb buy-to-let to have a substantial effect, they would come at a cost to the wider economy. Access to a well-functioning, affordable housing market, including for private rented properties, has been widely recognised to be crucial to labour mobility, and hence the overall efficiency of the labour market. Labour, Conservative and Coalition governments have for decades recognised the crucial importance of maintaining confidence in the buy-to-let sector, perhaps aware of the damaging, unintended consequences of the heavy-handed regulatory interventions by both Labour and Conservative governments of the 1950s and 60s. Any impediment to labour mobility will reduce employment, economic activity, and the economy’s long-run productive potential. 81

1.5 Budget 2016 In the 2016 Budget the Chancellor confirmed that the new higher rates of SDLT on purchases of additional residential property would come in from 1 April 2016, although larger investors would not be given an exemption as had initially been proposed. 82 In addition the time period for refunds would be 36 months rather than 18 months. Further details were given in the Budget report: Additional properties 1.125 As part of the government’s commitment to support home ownership and first-time buyers, the Autumn Statement 2015 announced that from 1 April 2016, higher rates of Stamp Duty 79 80

81

82

SP OR 16 December 2015 c34 Revenue Scotland publishes guidance on the operation of the charge on their site (LBTT Additional Dwelling Supplement guidance, March 2016). Treasury Committee, Spending Review and Autumn Statement 2015, 12 February 2016, HC 638 of 2015-16, para 120, paras 122-3 HC Deb 16 March 2016 c961

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Land Tax (SDLT) will apply to purchases of additional residential properties, such as second homes and buy-to-let properties. The higher rates will be 3 percentage points above the current SDLT rates and will apply to purchases of additional residential properties in England, Wales and Northern Ireland. 1.126 Following consultation, the government has decided: •

to help those moving in difficult circumstances, purchasers will have 36 months rather than the originally proposed 18 months to either claim a refund from the higher rates or before the higher rates will apply, in the event that there is a period of overlap or a gap in ownership of a main residence.



there will be no exemption from the higher rates for significant investors, and the higher rates will apply equally to purchases by individuals and corporate investors. 83

Mr Osborne also announced that the structure of SDLT on commercial property would be reformed, so that the tax would be charged on a ‘slice basis’, in the same way as residential property. 84 It was estimated that the new higher rates would raise £630m in 2016/17, rising each year to £855m by 2020/21. 85 At this time HM Revenue & Customs published guidance on the new higher rates for individuals purchasing property. 86 This is available online, along with the Government’s detailed response to the consultation. 87 The Department’s guidance gave a short summary of how the extra tax charge is calculated (p4): Where applicable, the higher rates will be 3% above the standard rates of SDLT that apply to purchases of residential property. Each rate will apply to the portion of the consideration that falls within each rate band:

For example, the SDLT due on a purchase of buy-to-let property for £300,000 that is liable to the higher rates would be £14,000, calculated as follows:

83

Budget 2016, HC901, March 2016 pp38-9 see also, HMRC, SDLT: higher rates on purchases of additional residential properties: tax information & impact note, 16 March 2016

84 85 86

87

Budget 2016, HC901, March 2016 paras 1.179-83; pp50-1 op.cit. p87 (Table 2.2 – item d) HMRC, Stamp Duty Land Tax: higher rates for purchases of additional residential properties, November 2016. HMRC has a helpline service for queries about SDLT

(either by phone, 0300 200 3510, or by post to, BT - Stamp Duty Land Tax; HM Revenue and Customs; BX9 1HD. HM Treasury, Higher rates of SDLT on purchases of additional residential properties: summary of consultation responses, March 2016

29 Stamp duty land tax on residential property

It summarises the four tests which must be met if someone buying a single property is to be charged the higher rates (p7): The higher rates will apply to the purchase of a major interest in a single dwelling by an individual, if at the end of the day of purchase Conditions A to D are met: •

Condition A - the chargeable consideration is £40,000 or more;



Condition B - the dwelling is not subject to lease which has more than 21 years to run on the date of purchase;



Condition C - the purchaser owns an interest in another dwelling which has a market value of £40,000 or more and is not subject to a lease which has more than 21 years to run at the date of purchase of the new dwelling; and



Conditions D - the dwelling being purchased is not replacing the purchaser’s only or main residence.

If any of Conditions A to D are not met the higher rates will not apply to the purchase.

The guidance gives more details on the criteria for applying these conditions, and how equivalent rules apply for joint purchases. 88 Many respondents to the consultation had raised concerns about the impact of setting an 18 month time frame for home buyers moving their main residence, leading to two changes in these rules: The government is clear that the higher rates of SDLT are not intended to impact those people who are moving from one main residence to another and are disposing of a previous main residence. To offer protection in this instance, the consultation proposed that: •

purchasers with more than one property who dispose of a main residence, have 18 months to buy a new main residence before the higher rates apply assuming they retain their additional property.



in the event that purchasers are subject to the higher rates of SDLT because they buy a new main residence before disposing of their previous main residence, they are entitled to a refund from the higher rates of SDLT if they dispose of their previous main residence within 18 months.

Many of the consultation responses discussed a wide range of hard cases which would benefit from a longer timeframe in both of these instances, owing to the additional difficulty in selling or 88

See also, “Property empire spoiler”, Taxation, 12 May 2016; “Finance Bill 2016: the 3% higher rates of SDLT”, Tax Journal, 24 June 2016; and, “SDLT: planning for higher rates transactions”, Tax Journal, 17 February 2017.

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buying a property. These difficult circumstances included those whose home has been affected by flooding, those going through divorce proceedings and those suffering from ill health. The government has decided to increase the 18 month period to 36 months, for both of the scenarios set out above, as the most appropriate way to provide additional support. This change gives extra time to those who are moving home in challenging circumstances to rearrange their affairs. The 36 month time period will commence from 25 November 2015 for those who had sold a previous main residence prior to the Spending Review and Autumn Statement 2015, in order to provide additional transitional support. 89

In general commentators focused on other elements of the Budget statement – such as the Chancellor’s announcement of plans for a levy on soft drinks producers to be introduced in 2018. 90 Unsurprisingly the Government’s decision not to have an exemption for large scale investors was criticised by the rented property sector: the Financial Times quoted Melanie Leech, chief executive of the British Property Federation, who argued that the higher duty rates would be “a significant deterrent to the institutional investment currently posed to settle in the purpose-built rented sector. David Cox, managing director of the Association of Residential Letting Agents, suggested that tenants would see rents rise to subsidise this tax increase. 91 Subsequently The Times reported that a survey by the Residential Landlords Association (RLA) found a large majority of landlords anticipated putting up rents as a consequence of these policy changes, and that more than half were considering selling some or all of their property portfolio. 92 Provision to this effect was included in the Finance Bill 2016, which was published after the Budget. At the Bill’s Second Reading on 11 April the Government confirmed that it would amend these provisions, following concerns that the purchase of a house incorporating a ‘granny annexe’ would be subject to the higher rates of duty. 93 When this clause was debated in Committee Treasury Minister David Gauke reiterated the changes the Government had made to its original proposals: Several aspects of the policy design have been amended in response to the … consultation. I have listened to those respondents who said that a longer grace period was required before the higher rates apply to homeowners who experience a gap or an overlap in property ownership when moving from their main home. For example, a purchaser may buy a new main residence before having the opportunity to sell their old one. The consultation proposed an 18-month grace period to purchase a new main residence after a former main home had been sold, or 89

90

91

92 93

Higher rates of SDLT on purchases of additional residential properties: summary of consultation responses, March 2016 p6 For an overview see, Budget 2016: a summary, Commons Briefing paper CBP7536,

18 March 2016. “Bigger landlords denied release from stamp duty surcharge”, Financial Times, 17 March 2016 “Crackdown on buy-to-let will push up rents”, Times, 11 April 2016 HC Deb 11 April 2016 cc101-2 see, “Granny annexe tax strikes at the heart of family values”, Times, 4 April 2016.

31 Stamp duty land tax on residential property

an 18-month period to dispose of an old one. In that case the Government would offer a refund from the higher rate. We have doubled the grace period to 36 months, which will help those moving home, including those moving in difficult circumstances. The consultation also proposed an exemption from the higher rates for significant investors. We have decided not to do this. A significant number of consultation respondents put forward the view that exemption for large investors would be unfair. The Government have accepted this. A single higher rate for all investors, regardless of scale, is simpler and more equitable than disadvantaging smaller participants. The Government’s assessment is that this will have an insignificant effect on housing supply and we are confident that housing developments will remain attractive for corporate investors as well as potential homeowners. 94

The Minister introduced three sets of amendments – including provision to prevent the higher rate being triggered by a residential property including a ‘granny annexe’: The Government have tabled three groups of amendments to rectify certain technical issues that have become apparent since the introduction of the higher rates. The first set … will ensure that so-called granny annexes will be exempt from higher SDLT when purchased with a main residence in the same transaction. We have decided that it would be unfair to change the higher rate when someone buys a main house that includes selfcontained living space for an elderly relative. The Bill as drafted would usually but not always exclude that, so we are amending it to put this beyond doubt. An annex will be defined by objective criteria. It must be on the same site as the main home and worth no more than one third of the total transaction value to ensure that the regime remains robust against avoidance … The second correction … will allow the Government to ensure that those who use Islamic finance to purchase their main residence will not be unfairly caught by the higher rate. This will ensure that the Islamic finance provisions are consistent with those that already exist within SDLT legislation. Finally, we are introducing a power to make wholly relieving changes by regulation … These [amendments] will allow us to react quickly if another unintended consequence, such as the treatment of annexes, comes to light, and they will ensure that taxpayers are not disadvantaged unnecessarily while waiting for the changes to come into force. 95

Speaking for the Opposition Rebecca Long-Bailey described this reform as “an important measure”, one that the Opposition were “broadly supportive” of. She went on to raise some concerns from stakeholders as to the length of the consultation period for the reform, the treatment of joint purchases, and the fact that ownership of property outside the UK would potentially trigger liability to the higher rates of duty: Stakeholders are concerned that the consultation ran for only five weeks and that the draft legislation was not published until two weeks before the measure took effect on 1 April 2016. Can the 94 95

Public Bill Committee (Finance Bill), Fifth sitting, 7 July 2016 c150 op.cit. c151. Although there have been relatively few PQs about this measure, Members have asked both about the 36 month period, and the treatment of granny annexes: see PQ32467 & PQ33441, 14 April 2016.

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Minister provide some assurance that due consultation has taken place on these big changes to the SDLT regime? Furthermore, there have been queries about what will happen in cases of joint purchase. If a property is purchased by more than one buyer and the higher rates apply to any one of them, the surcharge will apply to the whole of the chargeable consideration. The Government say that the measure is meant to support home ownership and first-time buyers, but does this provision not bring parents assisting their children to buy a first home into the scope of the surcharge, as the Institute of Chartered Accountants has suggested? … It would be sensible to keep the issue of joint ownership by parents and children under review, as their options for assisting each other to purchase property are significantly restricted by the new legislation. I would welcome the Minister’s thoughts on that. Finally … [the clause] provides that ownership of a dwelling outside the UK shall be taken into account in deciding whether the surcharge applies to the purchase of a dwelling in the UK. The Chartered Institute of Taxation highlighted some practical difficulties with determining ownership of a property in certain jurisdictions, and whether it is a main residence. I am therefore concerned about compliance. As we know, there is a large problem in the UK property market, especially in London, where non-UK nationals buying property are pushing up house prices. Will the Minister therefore confirm what measures are in place to ensure compliance by overseas property owners? 96

In response to these points Mr Gauke said the following: A number of technical points were made about the measures covered by this group. First, there was a point about how we deal with joint purchasers. We were asked why we do not use an apportionment approach for joint purchasers. A move to an apportionment system would increase complexity in the tax system and increase the risk of non-compliance. The Government’s approach is simpler than an apportionment system and has been settled on after careful consideration. Where a property is purchased jointly, the higher rates will apply if the property is an additional property of one or more purchasers. As to whether that is unfair to parents trying to help their children on to the property ladder, I do not think so. Parents may help their children on to the property ladder without being subject to the higher rates of SDLT—for example, a parent can offer direct financial support, or become the guarantor of the child’s mortgage—but if the parent purchases a property jointly with the child, the transaction may be subject to the higher rate if the purchase is an additional property for the parent. Offering exemption for properties purchased jointly with children would add complexity to the tax system, reduce revenue and increase compliance risks ... I was asked why the consultation period was short. Let me reassure the Committee that the consultation process was full and open, and that respondents’ views were taken into account. I accept that the consultation period was shorter than 12 weeks, but that was so that we could properly analyse the responses in time for the final policy design to be confirmed, and for the policy 96

op.cit. cc151-2. For details of the criticism made by the Association of Tax Technicians cited by the Member see, ATT press notice, Stamp duty hike 'incredibly unfair' on joint buyers, say tax experts, 23 March 2016.

33 Stamp duty land tax on residential property

to be in force, by 1 April. We recognise the effects on the property market of pre-announcing changes to SDLT rules, so there was a careful balance to be struck between providing stakeholders with the chance to have their say and not prolonging market disruption. On treating homes abroad in the same way as homes in the UK, SDLT is a self-assessed tax, and those making returns need to complete returns honestly. It would be unfair to treat those with first homes abroad more beneficially than those with first homes in the UK. Her Majesty’s Revenue and Customs monitors compliance and will check returns carefully. 97

In the event the clause, and the Government’s amendments, were agreed without a division. Some days after the passage of this legislation, the House of Lords Economic Affairs Committee published a report on housing policy. As part of this the Committee looked at options to encourage the better use of the existing housing stock, including possible tax reforms. Witnesses had highlighted a number of taxes as acting in a negative fashion, including SDLT, despite the changes made in 2014: Despite the 2014 reform, some witnesses still saw stamp duty as discouraging people from moving home. Countrywide said that while they estimated that 72 per cent of buyers paid no or less stamp duty than they would have done under the previous system, the reforms had only offered “brief respite for some [and] the stamp duty burden will continue to grow in future years”... Paul Johnson from the Institute for Fiscal Studies said he would put stamp duty “high on the list of suspects” as regards the reasons for lack of turnover in the secondary housing market.297 The Council for Mortgage Lenders said that stamp duty contributed to high transaction costs and so it had “a detrimental impact on activity levels, market liquidity and labour mobility”. They thought this was particularly so amongst people looking to downsize which was “restricting the choice of larger homes for younger families.” McCarthy & Stone, a provider of specialist housing for older people, called for an exemption for older people downsizing into specialist accommodation: “[it] would cost little but would greatly encourage the take-up of specialist housing and increase the number of people downsizing, as well as free up under-occupied housing … The number of housing chains this would create … would more than offset any loss of income for the Treasury.” Paul Smee from the Council for Mortgage Lenders said however that if you start to give holidays for particular groups, “to my mind it brings out more and more the fact that the whole tax needs to be overhauled, and the question of when it is levied and on whom needs to be asked.” Urban Vision thought that any changes to stamp duty, “a relatively small proportion of the cost of buying a house”, would not improve affordability as raising a deposit to buy a home was a much more important consideration. 98

97 98

Public Bill Committee (Finance Bill), Fifth sitting, 7 July 2016 c153 Select Committee on Economic Affairs, Building more homes, 15 July 2016, HL Paper 20 of 2016/17 para 234-7

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For its part the Committee expressed the view that “the weight of evidence suggests that stamp duty land tax can deter people from moving into a smaller home, acting as a barrier to making the best use of the houses that we already have.” 99 As noted, in its report on the 2015 Autumn Statement the Treasury Committee had expressed concerns about the impact that the new higher rates of stamp duty land tax might have on the property market. The Government published its response in October 2016, and on this question, said the following: The Government has taken steps to attract billions of pounds of investment to build homes specifically for private rent. This includes a £3.5 billion debt guarantee scheme to support the delivery of new homes purpose built for private rent, and the Build to Rent fund. The Spending Review announced funding to deliver 400,000 affordable housing starts by 2021, including 50,000 affordable homes for rent and 10,000 Rent to Buy properties. Planning permission for over 250,000 homes was granted last year alone. However, given a free choice, almost 90% of people say they want to own their home rather than rent [British Social Attitudes 2014]. Despite this, only 63% [English Housing Survey, 2013-14] of people in England owned their own home in 2013-14, and this figure has been falling since 2003. The government reforms of SDLT on additional properties, together with policies such as Starter Homes and Help to Buy Shared Ownership, are intended to support home ownership and first time buyers. The new higher rates of SDLT are expected to apply to less than 15% of property transactions per year, and are not expected to have an effect on rent levels. 100

In his 2016 Autumn Statement the Chancellor Philip Hammond announced a number of housing initiatives, as “for too many, the goal of home ownership remains out of reach”, but made no mention of this tax measure affecting landlords. 101 Similarly Mr Hammond made no mention of this issue in his Spring Budget statement on 8 March. 102 To date initial indications from stamp duty receipts is that the introduction of the higher rates of duty has not seen a significant downturn in receipts. 103 HMRC publish quarterly statistics on duty receipts, and have estimated that from April 2016 the extra 3% rate has raised about £1.6bn. 104 In answer to a PQ in March 2017 Treasury Minister Jane Ellison stated, “the latest HM Revenue and Customs data 99 100

101

102 103

104

op.cit. para 252 The Government’s response to the conclusions and recommendations of the Treasury Select Committee on the /Spending Review and Autumn Statement 2015 ,

13 October 2016 p15 HC Deb 23 November 2016 c902. See also, Autumn Statement, Cm 9362, November 2016 para 3.11-3. HC Deb 8 March 2017 cc809-22 “Buy-to-let landlords shrug off UK tax rise in £1bn Treasury boost”, Financial Times, 31 January 2017 Quarterly Stamp Duty Land Tax Statistics – March 2016, April 2017 (Table 6). HMRC note “we have included a quarterly estimate of the amount of SDLT paid due only to the 3% higher rate on additional properties. This figure is part of the total SDLT due on additional properties … The figures are classified as experimental statistics, as they are calculated based on the total amount paid. The amount coming from the 3% rate is not explicitly stated on the SDLT return.”

35 Stamp duty land tax on residential property

indicates that the revenue generated from the higher rates will exceed what was originally forecast when the policy was announced.” 105 That said, in October 2016 the OBR published some analysis of the extent of ‘forestalling’ in response to pre-announced property tax changes – that is, taxpayers taking account ahead of a tax change taking effect so as to mitigate their potential tax bill. The OBR looked at a number of episodes, in each case finding proof of sizeable forestalling, and, in the case of the announcement of the higher rates on additional residences – four months before implementation – estimated that “60,000 transactions were brought forward generating a net tax loss of over £300m.”106

105 106

PQ67719, 22 March 2017

Forestalling ahead of property tax changes – working paper no.10, October 2016

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2. Previous debate on the impact of stamp duty In their survey of the UK tax system, the Institute for Fiscal Studies discuss recent trends in the taxation of capital, and more specifically, stamp duty on house transactions as well as inheritance tax on the bequest of property and other capital at death: Capital is taxed not only directly by taxes levied on investment income and capital gains, but also by stamp duty on transactions of securities and properties and by inheritance tax on bequests. 107 The current form of inheritance tax was introduced in 1986 to replace capital transfer tax. When capital transfer tax had replaced estate duty 11 years earlier, gifts made during the donor’s lifetime had become taxable in the same way as bequests. But differences in treatment were soon introduced and then widened, until finally the new inheritance tax once again exempted lifetime gifts except in the seven years before death, for which a sliding scale was introduced … in an attempt to prevent people avoiding the tax by giving away their assets shortly before death. With all of these capital taxes, the 1980s saw moves to reduce the number of rates and/or align them with income tax rates. Thus in 1978 capital transfer tax had no fewer than 14 separate rates; since 1988 its successor, inheritance tax, has been charged (above a tax-free threshold) at a single 40% rate, equal to the higher rate of income tax … Four rates of stamp duty on properties were replaced by a single 1% rate in 1984 … Labour’s first Budget following the party’s election in 1997 announced the reintroduction of graduated rates of stamp duty on properties. The higher rates were subsequently increased, along with additional rates on properties worth more than £1m. Policy under the Conservative-Liberal Democrat coalition government continued in this vein until it followed the Scottish government in replacing the so-called ‘slab structure’ of SDLT for residential property (where higher rates for a particular transaction applied to the full sale price, not just the part above the relevant threshold) with a less – though still heavily – distortionary ‘slice structure’ … Initially, the slab structure of SDLT was curiously only removed from residential properties, unlike in Scotland, despite the same rationale applying. However, the March 2016 Budget introduced the same changes to non-residential SDLT. An additional rate was also applied to additional residential properties such as buy-to-let properties and second homes. Beyond these frequent changes, what did most to bring SDLT, along with inheritance tax, to public attention was rapid growth in house prices. From 1997 to 2005, house price inflation averaged more than 10% a year, far outstripping both the inheritance tax threshold (which has typically increased in line with general price inflation) and the stamp duty zero-rate threshold (which has typically been frozen in cash terms). Table 14 illustrates the implications of this.

107

Corporation tax is also relevant for capital invested in companies, and council tax or business rates for capital invested in property.

37 Stamp duty land tax on residential property

Notes and source to Table 14 Years are fiscal years (so 1993 means 1993–94) except for average house prices, which are for calendar years. a

Simple average, not mix-adjusted, so changes reflect changes in the types of property bought as well as changes in the price of a given type of property. b

c

Threshold for residential properties not in disadvantaged areas.

d

Excludes Scotland pre-2006. 2006 onwards and other columns are UK-wide.

Stamp duty threshold was increased to £175,000 for one year from 3 September 2008 and then extended until 31 December 2009.

e

f Stamp duty threshold for first-time buyers was increased to £250,000 for two years from 25 March 2010. g

Provisional. h Calendar year.

Source: Average house prices from Office for National Statistics, ‘House price index’, annual table 22. Numbers of taxpayers from HMRC. Total number of registered deaths , ‘Deaths by single year of age tables – UK’,. Property transactions liable for stamp duty from HMRC. When Labour came to power in 1997, around half of property transactions attracted stamp duty; over the following six years, this proportion rose to almost three-quarters as house prices doubled while the stamp duty threshold was unchanged. The link between house prices and inheritance tax is less direct, but since housing makes up about half of total household wealth, house prices are clearly an important determinant of how many

Number 7050, 23 June 2017 38

estates are affected by inheritance tax. A widely-reported concern was that rising house prices were making inheritance tax into a tax on ‘ordinary people’ instead of only on the very wealthy. However, although the proportion of death estates liable for inheritance tax more than doubled in a decade – increasing from 2.3% of the total in 1996/97 to 5.9% in 2006/07 – it remained small. Policy reforms in the late 2000s counteracted the spread of stamp duty and inheritance tax: the SDLT threshold was doubled in April 2005, temporarily increased by a further £50,000 for one year only from 3 September 2008, and then doubled again for firsttime buyers for two years starting 25 March 2010; and in October 2007, unused inheritance tax nil-rate bands became transferable to a surviving spouse or civil partner, reducing the number of estates liable to tax by a third and removing the threat of future inheritance tax for many couples. However, with rapid house price inflation and thresholds for both stamp duty and inheritance tax frozen since 2008, the proportion of deaths liable for inheritance tax reached a new high of 6.8% in 2015/16, while the proportion of houses liable for stamp duty equalled the high of the early 2000s. The introduction of a system of marginal rates and bands for stamp duty softens this effect somewhat, as house purchases slightly above the £125,000 threshold will attract only very small liabilities. The introduction of the main residence allowance in 2017/18 will reduce the proportion of estates liable for inheritance tax, but the projected trend remains upwards. While these thresholds are not appropriately indexed, this pattern of a rising number of liable taxpayers countered by occasional large policy changes is likely to persist. 108

Following the 2010 General Election, the Government set out its priorities for taxation in the Coalition Agreement. Although the Liberal Democrats had proposed a mansions tax in their election manifesto, the Agreement made no reference to any major reform to the taxation of housing, although it did say that the Government would “review the effectiveness of the raising of the stamp duty threshold for first-time buyers.” 109 As noted above, in March 2010 the Labour Government had doubled the nil-rate threshold, up to £250,000, for first-time buyers, although when announced, the then Chancellor, Alistair Darling, made it clear that this would be a temporary relief, to apply to purchases between 25 March 2010 and 24 March 2012. 110 In December 2010 the new Government confirmed that the relief would not be extended, citing analysis that had shown the relief “has been ineffective in increasing the number of first time buyers entering the market.”111 As house prices started to rise in some parts of the country, there was, as The Times reported at the time, growing pressure “on the Chancellor to raise stamp duty thresholds or phase in the tax more fairly to kick 108

109 110 111

A survey of the UK tax system : IFS Briefing Note BN09, November 2016 pp53-6. For

details of the debate over inheritance tax, and the new ‘main residence allowance’, see, Inheritance tax, Commons Briefing paper CBP93, 29 September 2015. The Coalition: our programme for government, 20 May 2010 p12 HC Deb 24 March 2010 c253 Autumn Statement Cm 8231 December 2010 p35. For details see, HM Revenue & Customs, Evaluating the Impact of Stamp Duty Land Tax First Time Buyer’s Relief, HMRC Working Paper 13, November 2011

39 Stamp duty land tax on residential property

start the housing market.” 112 However, there was little indication that the Government regarded cutting or reforming stamp duty as a priority. 113 Indeed, rather than cutting the rates of duty, in the previous two Budgets the Government increased them, and increased the amount of tax charged on the most expensive properties. In his 2012 Budget speech the Chancellor announced three changes to the taxation of homes worth £2m or more: A major source of abuse, and one that rouses the anger of many of our citizens, is the way in which some people avoid the stamp duty that the rest of the population pays, including by using companies to buy expensive residential property. I have given plenty of public warnings that this abuse should stop, and now we are taking action. I am increasing the stamp duty land tax charge applied to residential properties over £2 million that are bought into a corporate envelope. The charge will be 15%, and it will take effect today. We will also consult on the introduction of a large annual charge on those £2 million residential properties that are already contained in corporate envelopes, and, to ensure that wealthy non-residents are also caught by these changes, we will be introducing capital gains tax on residential property held in overseas envelopes. We are also announcing legislation today to close down the sub-sales relief rules as a route of avoidance. Let me make this absolutely clear to people. If you buy a property in Britain that is used for residential purposes, we will expect stamp duty to be paid. This is the clear intention of Parliament, and I will not hesitate to move swiftly, without notice and retrospectively if inappropriate ways around these new rules are found. People have been warned. It is fair when money is tight, and so many families could do with help, that those buying the most expensive homes contribute more. From midnight tonight, we will introduce a new stamp duty land tax rate of 7% on properties worth more than £2 million. 114

The new 7% rate was debated briefly at the Committee stage of the Finance Bill. Speaking for the Opposition on this occasion Catherine McKinnell welcomed the measure, though the main focus of her remarks was the Government’s decision in the 2012 Budget to withdraw the 50p additional rate of income tax: “in itself, it is not something that we oppose, but the concern is whether this is a genuine replacement for the 50p tax rate and whether it sufficiently enables that burden to remain on those who have the ability to pay the higher rates of tax, rather than shift it on to the squeezed middle to whom we often refer.” 115 In response the then Economic Secretary, Chloe Smith, said the following: 112

113

114 115

“Buyers are hit hard by ‘punitive’ stamp duty”, Times, 6 August 2013 – see also, “Unfair tax distorts the home market”, Times, 14 March 2014. When asked about the impact of the tax in early 2014, the Treasury Minister, David Gauke, simply said that the Treasury “has not made a recent assessment of the effect on stamp duty land tax on the functioning of the housing market or housebuying in England” (HC Deb 12 March 2014 c226W). HC Deb 21 March 2012 c804 Public Bill Committee (Finance Bill), Seventeenth sitting, 22 June 2012 c622. For more the debates over the 50p rate see, Income tax: the additional 50p rate, Commons Briefing paper SN249, 25 November 2015.

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Members have asked why the figures of £2 million and 7% were picked … The previous upper cost limit was £1 million and the previous upper rate of tax was 5%. Clearly, a balance needs to be struck in relation to raising more revenue and against overly punitive rates or thresholds. The central point is that if someone can afford to pay £2 million for a house, they can afford to pay a little tax towards the mammoth deficit in which the previous Government left this country … The new 7% rate will raise an estimated £150 million in 2012-13, rising to £300 million by 2016-17. That will help support the Government’s priority of reducing the deficit, and it is clearly more than the £100 million estimated to have been raised by the former 50p tax rate. 116

Prior to this, debate on the Finance Bill in April 2010, which included provision for the 5% rate on sales of £1m or more, was severely shortened due to the timing of the General Election, so that Members agreed to this clause, and nearly all of the rest of the Bill, with no debate. 117 The impact of the tax on the property market was discussed when the House debated the provision to set the highest rate of duty at 4% in May 2000, 118 and the slab/slice issue was examined when the House approved a £5,000 increase in the zero-rate threshold in June 2006. 119 In the 2013 Budget the Government confirmed that it would proceed with the new charge on so-called ‘enveloped’ property – the Annual Tax on Enveloped Dwellings (ATED). 120 In addition, the Government announced provisions, as Mr Osborne had warned, with retrospective effect, to tackle avoidance schemes that had subsequently come to light. 121 In the 2014 Budget Mr Osborne announced two further changes to this regime: two new tax bands for the ATED, extending it, by April 2016, to properties worth £500,000 or more; and extending the 15% stamp duty rate to properties bought in a corporate envelope. 122 The Budget report gave details: 1.192 As announced at Budget 2012, the government has introduced a number of new measures to discourage placing property in corporate envelopes to avoid stamp duty land tax (SDLT). These apply to residential properties valued over £2 million, and include a new higher rate of SDLT when the property is first ‘enveloped’; a new Annual Tax on Enveloped Dwellings (ATED); and a capital gains tax charge on any gains on disposal of enveloped properties from April 2013. 1.193 ATED has raised 5 times the amount forecast for 2013-14, with significantly more properties above £2 million in envelopes than expected. As well as discouraging SDLT avoidance, ATED incentivises commercial activities by providing relief where, for example, a property is rented out. 1.194 The government believes that ATED and the associated measures can discourage the use of corporate envelopes to invest 116 117 118 119 120 121

122

op.cit. cc627-8 HC Deb 7 April 2010 cc1099-1105 HC Deb 3 May 2000 cc260-266 Standing Committee Deb (A) 20 June 2006 cc752-5 Guidance on the tax is provided on HMRC’s site. Further details are given in Stamp duty land tax avoidance: retrospective changes to section 45 of the Finance Act 2003: Guidance Note, 20 March 2013 HC Deb 19 March 2014 c786

41 Stamp duty land tax on residential property

in high value UK housing which is left empty or underused while avoiding paying tax. The Budget therefore announces 2 new bands for ATED, to bring properties worth £500,000 to £1 million and £1 million to £2 million into the charge. The ATED-related capital gains tax charge will apply to properties in the new ATED bands. The 15% rate of SDLT that applies to acquisitions of properties by corporate envelopes will also be applied to properties valued above £500,000 with effect from 20 March 2014. 1.195 The government recognises that the structure of ATED can create some administrative burdens for genuine property rental, trading and development companies. The government will therefore stagger the introduction of the new ATED bands, with the £1 million to £2 million band coming into effect from April 2015, and the £500,000 to £1 million band coming into effect from April 2016. The government will also consult on possible simplifications to ATED administration to reduce compliance burdens for genuine businesses. 123

Further to this, in his Autumn Statement Mr Osborne announced that the ATED charge would be increased “by 50% above inflation on properties worth over £2m.” 124 Provision to increase the charge was included in the Finance Act 2015; it was estimated this would raise £95m in 2015/16. 125 The impact of the tax was debated at some length in a Westminster Hall debate, instigated by Anne Main, in September 2014. 126 Mrs Main argued that the nil-rate threshold should be increased substantially to take account of the rises in house prices, though she was also strongly critical of the ‘slab’ basis of the tax: Stamp duty land tax is a strong contender for the worst-designed tax, because the relevant rate applies to the full sale price. Transactions of very similar value are discouraged to completely different degrees and there are enormous incentives to keep prices just below the thresholds, as Collinson’s estate agents have pointed out. The Government should move away from this slab structure and tackle the unfairness of paying stamp duty on ordinary homes below £500,000. Overhauling stamp duty ... would fuel growth and increase wider tax receipts, and, above all, it would be fair and increase property ownership for those we say we would like to help. 127

Speaking for the Opposition Shabana Mahmood concurred that the impact of the duty was “a growing concern to the public”: Stamp duty is a matter of growing concern to the public and a significant burden on people wanting to buy a new home, particularly first-time buyers. I acknowledge the strength of feeling among hon. Members and throughout the country, but I am not in a position to make a spending commitment via this debate. Stamp duty brings in a large and growing amount of

123 124 125 126 127

Budget 2014, HC 1104, March 2014 p51 HC Deb 3 December 2014 c311 Autumn Statement, Cm 8961, December 2014 para 2.125, Table 2.1 – item 5 HC Deb 4 September 2014 cc151-174WH op.cit. c155WH

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revenue, and any policy change in this area would have to be fully funded. 128

In response Treasury Minister David Gauke pointed out that the greatest share of duty receipts came from properties of £500,000 or more. He went on to note that any revenue-neutral reform to the ‘slab’ basis of the tax would definitely involve an increase in duty rates: Although I understand the concerns raised today … the fundamental point is about the high cost of property. Removing or reducing stamp duty land tax will not by itself address the fundamental issues … My hon. Friend the Member for St Albans made the case for increasing the SDLT threshold to £500,000. On a static analysis, if we were to do that for 2015-16, the cost would be £4.2 billion. That static analysis does not take into account the behavioural response, but I do not believe that the behavioural impact of increasing the SDLT threshold to £500,000 would substantially reduce that cost … It is also worth pointing out that the majority of the revenue comes from those who buy the most expensive homes: 52% of SDLT residential yield comes from properties bought for more than £500,000, despite the fact that such properties represent only 6% of transactions. A third of all residential transactions do not involve the payment of any SDLT, which is a higher proportion than in 2007, when that figure was 29% … In 2013, a further 42% paid the 1% rate, which meant that 75% of all residential property transactions resulted in the payment of less than £2,500. Even the proportion of residential transactions involving the 3% rate has remained broadly stable. In 2007, 18% of transactions were affected by the 3% rate; in 2013, the figure was 19%. I argue that SDLT is progressive, because those who purchase higher-value property pay a higher share of tax … We must also consider who ultimately bears the burden of SDLT … HMRC analysis of the impact of [the SDLT holiday for first-time buyers] … indicated that the majority of the saving was incorporated into higher property prices, which made the relief largely ineffective and poor value for money; what buyers did not pay in stamp duty, they paid in higher property prices. [While it is the case that] … it is easier to get a mortgage that covers the purchase price rather than one that covers the purchase price and the SDLT, but we must bear in mind that the impact of changes in SDLT can result in benefits to the seller, rather than to the buyer … Nearly everybody who contributed to the debate mentioned the fact that SDLT has a slab structure rather than a slice structure. I will make two points in response to that. If we wanted to raise the same level of revenue under a different structure, it would be necessary to increase the applicable rates. That would not mean that people would pay more, but it would mean that rates would increase. We would need to think about that … Before changing the slab system, which predates 2003—in fact, it goes back to the 17th century—we would have to think carefully about the potential impact on the housing market. 129

128 129

op.cit. cc167-8WH op.cit. cc170-3WH

43 Stamp duty land tax on residential property

3. Stamp duty land tax statistics 3.1 Receipts Stamp duty receipts have generally been on an upward trend over the past forty years, a trend broken around periods of recession. In 2015/16 SDLT receipts were roughly £10.7 billion, £7.3 billion from residential property and £3.3 billion from non-residential property. 130 Such receipts are forecast to rise to over £17 billion in 2020/21, or £16 billion after adjusting for inflation. Stamp duty land tax (SDLT) receipts, 131 1974/75 - 2020/21, 132 UK £ billion, real 2015/16 prices 20 15 10 5 0 1974/75

1984/85

1994/95

2004/05

2014/15

3.2 Yield and transactions, by band In 2014/15 the stamp duty yields on residential property were split nearly 50:50 between those paying the tax for purchases between £125,000 and £500,000, and those paying for properties purchased at over £500,000. Around 2% of properties potentially liable for stamp duty were sold for over £1 million – these properties accounted for 30% of the stamp duty yield on residential property.

SDLT residential property: estimated yield and transactions,4 by band, 2014/15,5 UK6 100% £2,000K+

80% 60%

£1,000K - £2,000K

£500K - £1,000K

£250K - £500K

£500K - £1,000K

40% £250K - £500K

£125K - £250K

20% 0%

£125K - £250K

Estimated yield

Property transactions

133

130 131

132 133

HMRC, Quarterly Stamp Duty Statistics, Table 5, 29 April 2016 Includes residential and non-residential property transactions. Sources: HMRC, HMRC Tax Receipts and National Insurance Contributions for the UK, 21 June 2016; and, OBR, Economic and fiscal outlook, March 2016, Table 4.6 Forecasts after 2015/16 Sources: HMRC, UK Stamp Tax Statistics 2014/15, 30 September 2015; and, HMRC, Annual UK Property Transactions Statistics 2015, 30 June 2015

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BRIEFING PAPER

Number 7050, 23 June 2017

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