What will be the lasting impact of the stamp duty holiday announced in July by the UK chancellor, Rishi Sunak? The holiday has been great for the vast numbers of purchasers who are acquiring UK properties up to £500,000 in value. The maximum saving this provides is £15,000.
The rationale for the temporary change is straightforward. The stamp duty holiday will maintain and increase house prices. This provides an incentive for house-builders to keep building new homes which, in turn, creates jobs and generates tax revenue.
In short, the chancellor has swapped revenue now in the form of SDLT –and its equivalents in Scotland and Wales, land and buildings transaction tax (LBTT) and land transaction tax (LTT) respectively – for what he hopes will be more revenue later. With national debt at about £2trn, the holiday would not have been introduced unless absolutely necessary.
What impact is the stamp duty holiday having?
In terms of market activity, measured in volume, the stamp duty holiday seems to be doing the trick. July saw house prices go up by 1.7% compared with the previous month and in August the Financial Times described Britain’s housing marketas“defying gravity”. In the meantime, the share price of house-builders such as Persimmon and Berkeley Group has gradually started to recover. On the face of it, the holiday is a roaring success.
The impact does, however, depend to some extent on the perspective of the individual purchaser. It has, for example, disadvantaged first-time buyers by intensifying competition in the short term. Nor has the holiday got rid of other issues for purchasers such as the nervousness of lenders and their substantial deposit requirement. Finally, there is still a climate of economic uncertainty and reduced job security for many.
What will happen after the stamp duty holiday ends?
It has been pointed out by commentators that the expiry of the stamp duty holiday is not far away – 31 March 2021. Particularly since transactions can move at a snail’s pace as long chains and fragmented service providers inevitably hold things up.
History tells us that transaction numbers will continue to increase, spike just before 31 March 2021 and then plunge. The introduction of the additional 3% surcharge rate of SDLT on 1 April 2016 certainly had a similar effect. Residential property sales went from a peak of over 100,000 in March that year to fewer than 50,000 sales in April. Much of the peak was driven by buy-to-let investors and had the effect of driving out first-time buyers.
What are the chancellor’s options?
I expect the chancellor is weighing up big questions and the pros and cons of the different options available to him. He will be conscious of not undermining the rationale behind introducing the holiday in the first place. He will also need to decide how much of the cost of restoring government finances the housing market should bear.
I think the chancellor has six options open to him:
1. Do nothing
The SDLT holiday is simply allowed to come to an end. The scenario described above plays out in one way or another. Prices would be sustained until March but a lack of purchasers in April 2021 onwards would lead to a reduction in transaction in volume.
It is not immediately clear that this would lead to a reduction in prices. The pricing drops in April and May of 2020 were not as big as one might have expected. It is worth remembering that there were a number of other measures in place to provide economic support, including the coronavirus Job Retention Scheme, protection for tenants, mortgage holidays and the Help to Buy scheme.
2. Extend the holiday
The most obvious approach would, of course, be to extend the holiday. However, a perpetual holiday will quickly start to feel like the status quo. The holiday is working because it is a temporary measure. It creates an impetus.
The housing market is dependent on the health of the wider economy, which is in a weakened state following the pandemic and due to uncertainties as to the UK’s position post Brexit. As measures put in place to support employment and to protect tenants and homeowners come to an end, an extension of the holiday may be insufficient, in itself, to maintain house prices and by extension stimulate house-building. On that basis, extending it for a sustained period could be self-defeating and expensive.
3. Limit access to the holiday
A more surgical approach would be to remove the benefits of the stamp duty holiday for some but leave it for others. For example, BTL investors could be removed from the holiday while it remains in place for those seeking to move house, including first-time buyers. This would be relatively easy to legislate for and the statutory framework already exists to make a distinction between different types of purchasers for SDLT purposes.
This approach could taper the housing market’s reliance upon the stamp duty holiday. It would help avoid a significant drop in volumes and prices in April. This would also maintain the incentives for house-builders. It would, nonetheless, represent an extension of the holiday with the related issues discussed above.
We must also remember that BTL investors, in particular those raising capital outside the UK, are likely to be more insulated to overall economic weaknesses and are in a position to benefit from any reductions in housing prices.
4. Deferred payment of SDLT
Over time, the current form of SDLT could be transitioned from an upfront payment to a liability that is paid over a longer period of time. This would be akin to a council tax type arrangement with the cost spread over a fixed or ongoing period.
A mechanism would need to be incorporated to capture a scenario where a buyer moves twice in a short period of time. This is arguably achievable as such a person may have realised liquid funds in order to settle the liability. This might also provide the opportunity for the government to gradually increase the effective rate of SDLT without as many negative consequences.
5. Make SDLT a seller problem
Dramatically, the chancellor could seek to convert SDLT, which is currently a buyer problem, into an additional form of capital gains tax, a seller problem. There are a number of advantages to this approach that are aligned to government policy.
It would, by default, favour first-time buyers and could be attractive to build-to-rent investors due to reducing the upfront costs of acquiring UK residential property. It might also simplify the tax system through excluding certain persons and certain properties from stamp duty land tax.
The real problem with this approach is a political one. The rate of capital gains tax on the disposal of residential property has recently been increased from 20% to 28%. In addition, a CGT replacement of SDLT would logically require the removal or partial removal of private residence relief to be effective. This would be a guaranteed vote-loser and it is hard to envisage it being seriously considered by ministers.
6. The radical option
Could the chancellor explore a ‘wealth tax’? This radical idea has been floated during lockdown. However, wealth taxes have generally not been successfully introduced in other countries. At a time when the UK is going it alone outside the EU, it would surely be wishing to encourage wealth within the country.
A wealth tax is not without inherent problems. If it is applied to residential property, there is the secondary problem of practical affordability for those who have illiquid wealth. It would also discriminate against BTR investors in comparison with investors in commercial property.
Whatever route the chancellor ends up taking, we must hope that a significant amount of thinking is already taking place. The government must understand and manage the potential pitfalls of the end of the stamp duty holiday. If the housing market grinds to a halt, this may well undermine the other measures taken in order to get Britain building again.
