A lofty aim – reforming SDLT

6 Sep 2019

I live in the epitome of Suburbia. If it was a sit-com, I would be Terry to my wife’s June, Jerry, to her Margo. Suburbia is changing, however, and not for the better. There is a boom in Velux windows. Loft extensions are in vogue. Some homes are going through almost full demolition and rebuild. Gardens are making way for garden extensions. Garages, for playrooms. Aesthetically, a pretty street that was designed in the 1930s with love and attention, is becoming something akin to Dr Frankenstein’s Monster, with various new parts being grafted on to homes. One house has had so many extensions added that it soon will be akin to a small budget hotel in size and demeanour.

Schools policy explains part of this; once parents have bagged a home in a good catchment area they don’t want to move. But even within the same catchment area, people are rarely moving, and the main culprit is stamp duty land tax (SDLT). A family house in our area will easily cost £550k to purchase and therefore come with an SDLT bill of £34k. The economics of moving simply do not stack up, and so families don’t. The result is little movement in the housing market. Third steppers add value and extend, rather than move. Second steppers don’t step because there is nothing to step up to. And, ideal starter homes are still occupied by second steppers.

Solutions are therefore up for discussion, despite the Chancellor having mooted moving SDLT to a sales tax, rather than a purchase tax, and then as quickly withdrawing that idea was ever his, or on his agenda in the first place. So, in that spirit, what other reforms could unblock our bunged up housing market?

  1. A net SDLT system - SDLT would only be charged on the difference between current value of property and new value of property. This would only apply to principal private residences (PPRs) and could be limited further to PPRs that have to be in more than 180 days UK residence per year to qualify.  It would encourage liquidity. It would free up more cash at the point of purchase for improvements and refurbishments. It would allow the workforce to be more flexible and switch between locations. No SDLT would be payable on people downsizing. The Government could also use the opportunity to abolish the 3% surcharge for investments and second homes, as this would be included in the overall charge for transactions that don’t qualify for this relief. The primary disadvantage would be the impact on revenue, but this may be offset in part by more transactions. A shortfall may have to be made up for by a change in rates though.
     
  2. Allow SDLT to be spread over a period - This could be offered as an option, again only on primary residences. It could be linked to tax codes, and so included in PAYE and therefore would not need a separate collection mechanism to be monitored. SDLT paid, however, is not an issue for the majority of buyers as the SDLT can be rolled up as part of a mortgage, providing there is sufficient equity to pass affordability tests, and at the cost of paying interest on the larger summed borrowed. Spreading the payments may therefore provide a palatable alternative for some borrowers, but arguably is as much the psychological as the actual cost of paying a large SDLT bill that dissuades many a mover.
     
  3. A life-time allowance - i.e. no one pays the first  £15,000 of SDLT on their primary residence. This would support first time buyers and second steppers, but could still cause stagnation at the other end of the market e.g. third/fourth time movers, who through no fault of their own may have to move a lot, and it would offer no relief to downsizers, etc. It would also add complexity and require careful monitoring arrangements.

Given the significant variation in house prices across the country and impact on different generations it is difficult to propose changes that avoid being unduly regressive, or hit/boost particular generations. There are of course reliefs already, which seek to help those just finding their feet on the housing ladder, with the first £300k SDLT free and a lower rate up to £500k for first time buyers. Helping downsizers has its advocates, but we have always been careful of policies that spare those who are downsizing, out of sympathy for those who may not even have their foot on the first rung of the housing ladder. In tough times there has always been more pressing priorities. Something like a net SDLT system, however, may be more palatable, because it is not targeting just downsizers (though undoubtedly they would be a major beneficiary), but applies to everyone.

All of these ideas increase the complexity of the SDLT system and we have long been advocates for a simpler system. However, the importance of a well-functioning and liquid housing market is probably more important that the need for simplicity. There is of course another simple solution, which is to support peoples’ aspirations by cutting SDLT rates or changing the current thresholds!