Cut your tax bill… take up smoking

By Giles Croot, Managing Partner

This week’s GDP figures were a reminder – if we needed one – about the economic mountain that the UK (and much of the rest of the developed world) is facing.

A week ago, the Chancellor of the Exchequer unveiled his programme intended to get the nation spending and working again.  Eat out to help out, VAT reductions and a cut in stamp duty on residential properties.

Governments have relatively few tools to make people do things.  But the tax system is an effective way of discouraging behaviours they want to discourage or encouraging actions they want to encourage.

Pension saving is encouraged through tax breaks.  Smoking and alcoholic drinks taxed heavily.

Rishi Sunak’s cut in stamp duty, temporarily, reduces the cost of moving home by up to £15,000.  But the fact that it’s seen as desirable, even necessary, at this time simply reinforces why residential stamp duty is a tax which works against almost every other effort of government.

Before Gordon Brown increased stamp duty in his early budgets, it was a flat rate 1% on properties over £60,000.  Meaning for vast swathes of the country only the largest properties were subject to the tax.

A growing family would move house for an extra bedroom, a larger garden to kick a ball about or a nicer area when a promotion came in.  A new job out of town?  A family would frequently move.  The housing market was always illiquid and demand was outstripping supply (in part due to credit being more easily available from the 1980s) but people could afford to move or upgrade reasonably frequently.

By 2003-2004, the higher stamp duty rates and house price inflation was yielding a 5-fold increase in stamp duty.  Had the £60,000 threshold kept pace with property inflation, it would have been £134,000.  Sixteen years later the normal threshold is £125,000.

Stamp duty is no longer an affordable inconvenience for those buying the most expensive homes – it is a massive incumbrance for social mobility.

The average house price in London is around £640,000 – in commutable areas around the metropolis you’re still looking at an average ask north of half a million.  That’s a £15,000-plus bullet payment when you move to the average house.

When you bear in mind that last year the median earnings came in at just north of £30,000 – with income taxes (and before VAT) your marginal tax rate for the year you move is now 70%.  Or to put it another way you’ve got £750 per month left over to pay for food, transport and the mortgage you’ve just taken out.

So little wonder that people don’t move any more.  They build a loft conversion or a cellar.  They extend into their back garden and tarmac over the front so they can park their family car.

We’ve taken an illiquid market and made it tighter – pushing up house prices and putting the dream of home ownership out of the reach of many (and increasing the amount of stamp duty on a property!).

Now moving home was always a big deal – finding new schools for the children, leaving friends, clubs and favourite haunts wasn’t something you did lightly.  But with a new job across the country that’s what you did.  So much less so now.

The concept that you can move every three or four years as your work moves is an unaffordable dream.  So we commute further, we overcrowd public transport or burn rubber and fill our air with noxious nitrates and carbon dioxide as we endure the variable speed limits on our smart motorways.

Family life suffers, the environment suffers, we have a less mobile labour force and an inefficient use of our housing stock.

For here’s the crowning glory.  Big family homes full of emotional, happy memories where children have long since moved out, where people no longer need to walk daily to the railway station for the commute into town.  But where the cost of moving to a slightly smaller house in a different part of town is so painful, people stay put even if they’d like less space and less expense – making it harder for young families who need the space.

As we see the Government trying to communicate the need to get out and spend money, to re-engage with the economy, the cut in stamp duty is a powerful tool to encourage that behaviour.  But in a world of Zoom, Teams and Google Meets, a six-month tax holiday isn’t going to fix our housing market or free up the economy.

For the sake of the environment, our families, the economy and people who need somewhere to live, it’s time to return stamp duty to an inconvenience on the purchase of our most expensive homes – because today you’d be better off chain-smoking cigarettes than moving home.  Is that really what the taxman wants?