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BRIEFING PAPER

Number 7050, 16 December 2019

Stamp duty land tax on residential property

By Antony Seely and Matthew Keep

Inside: 1. Reforms to stamp duty land

tax (SDLT) 2. Previous debate on the

impact of SDLT 3. SDLT statistics

Number 7050, 16 December 2019 2

Contents Summary 3

1. Reforms to stamp duty land tax (SDLT) 5 1.1 Autumn Statement 2014 5 1.2 Initial reactions 9 1.3 The Stamp Duty Land Tax Act 2015 15 1.4 Autumn Statement 2015 26 1.5 Budget 2016 30 1.6 Autumn Budget 2017: relief for first-time buyers 39

Budget announcement & first reactions 39 Finance Bill 2017-19 52 Initial evidence of impact 53 Budget 2018: FTBR & shared ownership 54

1.7 Budget 2018: SDLT and non-residents 58

2. Previous debate on the impact of SDLT 65

3. SDLT statistics 72 3.1 Receipts Error! Bookmark not defined. 3.2 Yield and transactions, by band Error! Bookmark not defined.

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

3 Stamp duty land tax on residential property

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 2018/19 stamp duties raised £15.6 billion in total; SDLT accounted for just over three quarters of this total (£11.9 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 HM Revenue & Customs, UK Stamp Tax statistics 2018 to 2019, October 2019. HMRC collate statistics on

stamp taxes on Gov.uk. 2 HC Deb 3 December 2014 c316. Further details were given in, HM Treasury, Stamp duty reforms on

residential property, 3 December 2014. 3 Autumn Statement, Cm 8961, December 2014 pp52-4, p64 (Table 2.1 – item 4). 4 HC Deb 4 December 2014 c427, c476. See also, HMRC, Stamp Duty Land Tax: reform of structure, rates

and thresholds, December 2014 5 HC Deb 16 March 2016 c961. Budget 2016, HC901, March 2016 pp38-9. 6 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).

In the 2017 Autumn Budget the then Chancellor Philip Hammond announced that for first time buyers, the price at which a property became liable for SDLT would be set at £300,000. The relief would come in with immediate effect but would not apply for purchases of properties worth over £500,000. It was estimated that the new relief would cost £125m in 2017/18, rising to £560m in 2018/19.8 Provision for the new relief was included in the Finance Act 2018 (specifically s41 of the Act).9 No major reforms to SDLT were made in the 2018 Budget, although Mr Hammond announced that the relief for first-time buyers would be extended to all first-time buyers of shared ownership properties valued up to £500,000. Relief would be retrospective so that first time byers who had made such a purchase since the previous Budget would benefit. It was estimated this measure would cost £5m in 2019/20.10

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.11

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.

Over this period SDLT has been devolved to both Scotland (from April 2015) and Wales (from April 2018). Both the Scottish and Welsh Governments charge their own replacement taxes: the Land and Buildings Transactions Tax collected by Revenue Scotland; and the Land Transaction Tax collected by the Welsh Revenue Authority. In both cases higher rates of tax are charged where the purchaser already owns a residential property, and in the case of Scotland, tax relief is also provided for first time buyers. Statistics on each of these taxes are published by Revenue Scotland and the Welsh Revenue Authority. In addition the Office for Budget Responsibility publishes statistics on historic receipts and projected revenues from all three of these property transaction taxes. The OBR’s most recent forecast is that in 2019/20 SDLT will raise £11.6 billion, while its Scottish and Welsh equivalents will raise £600m and £200m respectively.12

7 HC Deb 16 March 2016 cc958-9. Budget 2016, HC901, March 2016 paras 1.179-83 & HMRC, SDLT:

reform of charging provisions for non-residential property – tax information & impact note, March 2016. 8 HC Deb 22 November 2017 cc1059-60. Autumn Budget 2017, HC 57, November 2017 para 5.28, Table

2.1 – item 5 9 For guidance on the coverage of the new relief see, HMRC, Stamp Duty Land Tax: relief for first time

buyers, November 2018. 10 HC Deb 29 October 2018 cc663-4. Budget 2018, HC 1629, October 2018 p46, Table 2.1 – item 37 11 Tackling the under-supply of housing in England, CBP7671, 10 December 2018 & Stimulating housing

supply: Government initiatives (England), CBP6416, 15 May 2019. 12 OBR, Economic & Fiscal Outlook, CP 50, March 2019 (Table 4.3); Supplementary fiscal tables: receipts and

other: Table 2.6 Property transactions taxes: Receipts by sector, March 2019

5 Stamp duty land tax on residential property

1. Reforms to stamp duty land tax (SDLT)

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.13

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.14

The Autumn Statement illustrated the difference between the two rate schedules, as follows:15

13 The rates of duty over the last fifty years are shown in, HMRC, Stamp duty tax

parameters, September 2013. 14 HC Deb 3 December 2014 c316 15 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 2015/16.16

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.17

To illustrate the impact that the old tax structure had had on house prices, the report presented data on residential property transactions in 2013/14:18

16 op.cit. p64 (Table 2.1 – item 4). See also, HM Treasury, Autumn Statement policy

costings, December 2014 pp10-11 17 op.cit. para 1.206-7 18 op.cit. p52

7 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 2012.19 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.”20

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:21

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

19 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 BCP5984, 23 January 2015.

20 Autumn Statement, Cm 8961, December 2014 para 1.211 21 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:22

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:23

22 Autumn Statement, Cm 8961, December 2014 p54 23 Economic & Fiscal Outlook, Cm 8966, December 2014 p126

9 Stamp duty land tax on residential property

At this time HM Treasury published a note on the implementation of the new tax structure, 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.24

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 high-value 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 will the Chancellor not have an annual charge on the highest

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

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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?25

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.26

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:

• 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.27

25 HC Deb 3 December 2014 c320. For more details on the proposal for a ‘mansions

tax’ see, Land value taxation, Commons Briefing Paper CBP6558, 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).

26 “Introductory remarks: Paul Johnson”, Institute for Fiscal Studies: Autumn statement 2014 briefing, 4 December 2014 p6

27 “Personal taxes and benefits: Stuart Adam”, Institute for Fiscal Studies: Autumn statement 2014 briefing, 4 December 2014 (slide 6)

11 Stamp duty land tax on residential property

In a press notice the Chartered Institute of Taxation called the reform “great news”:

Brian Slater, Chairman of the CIOT’s Property Taxes Sub-Committee, 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?”28

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.”29

Both the IFS and the ICAEW gave evidence to the Treasury Committee at this time, as part of its 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 policy should be fair. By imposing thousands of pounds of

28 CIOT press notice, It’s ‘goodbye cliff edges’ as banks pay for house tax shake-up, 3

December 2014 29 ICAEW (Tax Faculty), ICAEW detailed response to 2014 Autumn Statement,

December 2014

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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.30

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.31

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.32

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 property rather than just the portion over the threshold. Mr

30 Autumn Statement, 13 February 2015, HC 870 of 2014-15 para 133-4 31 “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

32 “Editorial: He cannot be serious”, Guardian, 3 December 2014

13 Stamp duty land tax on residential property

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.33

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.34

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.35

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:

33 “Editorial: George Osborne has given Britain a clear choice for 2015”, Daily

Telegraph, 4 December 2014 34 “Leader: Lucky George”, Times, 4 December 2014 35 “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.36

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.”37

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).”38 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.”39

In 2015 HMRC published an assessment of these reforms, which found in the year after the reforms, the number of residential property transactions above £1m was the same as the year beforehand.40

36 “The prime London property tax”, Financial Times, 3 December 2014 37 “Stamp duty change shows Osborne is addicted to rising house prices”, Guardian, 3

December 2014 38 EFO, Cm 8966, December 2014 p221, para A.16 39 op.cit. p127 40 PQ9056, 11 September 2017

15 Stamp duty land tax on residential property

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 non-residential (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.41

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 stand-alone 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.42

To give immediate effect to these tax changes, following the Chancellor’s statement the Government moved a Provisional Collection of Taxes Motion.43 This was debated and approved the following day.44 On this occasion Treasury Minister David Gauke argued, “this is a

41 HMRC, SDLT: reform of structure, rates and threshold, 3 December 2014 42 Email correspondence with HM Treasury, 3 December 2014 43 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. 44 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.45

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?46

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

45 op.cit. c459 46 op.cit. cc459-60

17 Stamp duty land tax on residential property

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.47

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.48

The other Members who spoke in the debate strongly supported these reforms.49

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—

47 HC Deb 4 December 2014 cc460-1 48 op.cit. c462, c464 49 specifically, Anne Main (c465), Mark Reckless (c467), Ian Swales (c469), Marcus

Jones (c470) & Dominic Raab (c472).

Number 7050, 16 December 2019 18

in other words, a basic rate taxpayer. That would be a perfectly sensible and adequate way of helping those people.50

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?51

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.52

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 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 future uprating, but future Governments will clearly wish to return to that in the long term.53

50 op.cit. cc463-4 51 op.cit. c461 52 op.cit. cc474-5 53 op.cit. cc475-6. The motion was approved without a division.

19 Stamp duty land tax on residential property

The Bill was given a Second Reading on 10 December.54 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.55

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.”56 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.57

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 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 54 HC Deb 10 December 2014 cc908-921 55 op.cit. c909 56 op.cit. c913 57 Sixth special report, 27 March 2015, HC 1151 of 2014-15 pp9-10

Number 7050, 16 December 2019 20

from the transitional rules, which is a substantial number.”58 The debate was relatively short as only two other Members made speeches, and the Bill was given a second reading without a division.59

The Bill’s remaining stages in the Commons were completed on 12 January 2015.60 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.61

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.”62

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?”63

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, and if the right hon. Gentleman is suggesting there may be more

58 HC Deb 10 December 2014 c916, c919 59 Anne Main (c916) and Ian Swales (c918), who both supported this reform. 60 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.

61 HC Deb 12 January 2015 c614, cc619-20 62 op.cit. c615 63 op.cit. c616

21 Stamp duty land tax on residential property

complex effects that I have not understood, I would like the Minister to clarify whether I am missing something.”64

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.65

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.66 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.

64 op.cit. c617 65 op.cit. c620 66 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 non-residential land and buildings transaction tax and Scottish landfill tax at the rates that I announced back in October.67

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.”68

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.69 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.70

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.”71

Following the passage of the legislation to implement the reforms to SDLT, the issue gathered 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

67 SP OR 21 January 2015 cc20-21 68 CIOT press notice, Scottish property taxes changes highlight move of dynamic tax

environment, 21 January 2015 69 For more details see, Devolution of financial powers to the Scottish Parliament:

recent developments, Commons Briefing Paper CBP7077, 1 March 2016. 70 Treasury Committee, Oral evidence: Proposals For Further Fiscal and Economic

Devolution to Scotland, HC 760, 20 January 2015 p8, Q248. 71 Treasury Committee, Autumn Statement, HC 870, 13 February 2015 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.72

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.73

These criticisms were also made in a report published by the Family Building Society in November 2017;74 a survey of its customers found that SDLT was “the second most important influence on [customers’] decision whether or not to downsize”:

Downsizers must write a cheque to HMRC when they buy their new home. They can’t buy something that costs the same as their original house without spending money on the tax but can stay where they are for nothing. Many therefore do stay, continuing to live in homes that may be highly unsuitable for their needs and imposing additional costs on health and social services.

This lack of activity in turn reduces the demand for new housing that suits older households and means there is less choice for those who do want to move. The UK is almost alone in the developed world in having so few retirement communities which can help keep people healthier and connected.

72 “Chapter 10: Options for increasing tax”, The IFS Green Budget, February 2015

p259 73 “Stamp duty is an economic nonsense”, Times, 22 November 2016 74 LSE, Stamp Duty Land Tax is suffocating the housing market, 11 November 2017

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Respondents [to the survey] with adult children said SDLT limited their ability to buy without parental help. SDLT increases the already difficult deposit requirement; in addition, because it makes older households less likely to sell, there are fewer suitable homes on the market. This makes it difficult not only for first-time buyers but also for families and second steppers to get the housing that is best for them.

SDLT contributes to reduced household mobility. Having bought a home, people are unwilling to move again soon and ‘waste money’ by paying SDLT twice over. This is costly for individual households as they are less likely to take up new job opportunities (or, if they do, may need to commute long distances); it is costly for the economy because it inhibits the efficient allocation of labour, and consumer expenditure and housing investment are lower than they otherwise would be.75

The Government’s position on this aspect of the tax was set out in answer to a PQ at this time:

Asked by Alex Sobel : To ask Mr Chancellor of the Exchequer, whether he has considered the use of stamp duty relief to encourage homeowners to downsize.

Answered by: Mel Stride : At Autumn Statement 2014 the government reformed Stamp Duty Land Tax (SDLT), cutting the tax for 98% of homebuyers who pay it. The new system reduced SDLT for most transactions, including for those looking to downsize.

In most cases it is likely that the financial gain that property owners receive from downsizing will outweigh the costs of doing so, as Private Residence Relief means that most homeowners will not pay any Capital Gains Tax when they move home.76

In January 2018, the operation of the tax was raised in a Westminster Hall debate by John Stevenson, who argued that reforming SDLT to a sales transactions tax would be a way to improve household mobility; an extract from his argument is reproduced below:

Stamp duty is effectively a buyer’s tax. My proposal is simple: change the tax to a sales transaction tax, so that the responsibility for paying stamp duty transfers from the buyer to the seller …

At present, first-time buyers have to find a deposit, the costs and the stamp duty, even though the mortgage only covers the purchase price. The change would therefore help first-time buyers, because they would not have to look for money to pay the stamp duty land tax … If somebody wants to move up the chain by selling their smaller house and moving on to a bigger house, because they have a growing family or for other reasons, they would benefit quite significantly from the change. They would still have to pay stamp duty, but it would be on only the lower-valued property. The higher-valued property would not be paid for by them. There would be a clear saving for somebody who was moving up the housing ladder …

My view is that if somebody wants to downsize they will probably go ahead, but more importantly the people who are upsizing will get the advantage, and will therefore be interested in the market

75 Family Building Society/LSE, A taxing question: is Stamp Duty Land Tax suffocating

the English housing market?, November 2017 pp2-3 76 PQ110354, 7 November 2017

25 Stamp duty land tax on residential property

… I believe that those who own their property are in a better position to pay the tax when they sell. We also have to look at people who have second homes. They are probably in a much better position to pay the tax because they have an asset that, again, will probably have increased in value. Touching on the hon. Gentleman’s point about individuals and families who are downsizing, quite often properties are sold as part of an estate, when somebody in the family has died. The property probably does not have a mortgage on it, so it will be a windfall for the family. They are therefore in a much stronger position to deal with the payment of that tax.77

Mr Stevenson also proposed a small practical change to the SDLT form as a way to help HMRC’s efforts to prevent tax evasion:

At present, when someone submits an SDLT form, the national insurance number of the buyer goes on the form. I suggest that we change that slightly, so that the seller’s NI number also goes on the form. Why? It would give Her Majesty’s Revenue and Customs an opportunity to check two things: capital gains tax and payment of income tax. That is particularly relevant to people who have second, third or fourth properties and is not related to the principal private residence.

I believe that there may be some uncollected tax, because it is possible for people to avoid paying income tax on a rental property, or capital gains tax. Ensuring that the seller’s national insurance number is also on the form would be a great way for HMRC to cross-check to make sure that, over the period of ownership, the seller has paid income tax, as well as to confirm whether capital gains tax is due when the property is sold.78

In response Treasury Minister Mel Stride raised a number of objections to transferring stamp duty from buyer to seller, although he suggested that HMRC would consider Mr Stevenson’s second proposal:

[My hon.Friend’s] suggestion about transferring stamp duty from the buyer to the seller was thoughtful and one that, he will not be surprised to hear, the Treasury has given thought to. We have done considerable research into it. It would be a significant step and therefore one that we should take only if the benefits are clear.

The legal liability for stamp duty rests with the purchaser, but evidence suggests that the cost of stamp duty is reflected in the value of the property. That is of particular concern with respect to my hon. Friend’s suggestion, because it means that switching the formal liability to the seller would be likely to have a limited effect on the overall cost of purchasing a house. My hon. Friend’s argument would have been stronger before we changed stamp duty for first-time buyers.79 Now the vast majority—80%—of first-time buyers have no stamp duty and 95% benefit from our changes. Before those changes, of course his proposal would have made a significant difference.

Another point … with respect to those downsizing, would be of concern to us, because there might be a reason for people not to downsize when we want those who are a bit older with larger homes to consider moving into smaller homes—if they wish to, of

77 HC Deb 23 January 2018 c103-5WH 78 op.cit. c106WH 79 This was announced in the Autumn 2017 Budget, and is discussed below in section

1.6 of this paper.

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course—freeing up properties for the next generation. We will give the suggestion thought, and I am happy to meet anyone about it, but it is not something that we are considering at present.

The other suggestion made by my hon. Friend … was interesting. I would like to take it up with him and hear more. I am happy to meet him with my officials to take it forward. I think Her Majesty’s Revenue and Customs would be interested in considering the idea.80

Subsequently Mr Stride reiterated the Government’s position on this issue, in a written answer in May 2019:

Asked by Stephen McPartland : To ask the Chancellor of the Exchequer, whether he has plans to exempt pensioners from Stamp Duty when they downsize their homes.

Answered by: Mel Stride : Most owners wishing to downsize are likely to have equity in their current property, and are already exempt from Capital Gains Tax on any gain made on their main residence. For most of those looking to downsize, the SDLT due on the move-in property will be small, and in most cases, it will be lower than estate agent’s fees.

The Government therefore has no current plans for a further relief for those looking to downsize. The Government’s priority is to support first time buyers, which is why the Autumn Budget 2017 announced the introduction of First-Time Buyers’ Relief. Since its introduction, 288,300 households have benefitted from First-Time Buyers’ Relief, saving around £2,360 on average.81

Subsequently Leigh Sayliss (Howard Kennedy LLP), and a member of CIOT's Property Taxes Sub-committee, discussed some of the obstacles to the reform in a blog post for the CIOT, not least that, “the switch in regime will, itself, give rise to possible inequity. People who bought a property and paid the SDLT under the current regime would then have to pay SDLT again when they sell – effectively paying SDLT twice on the same property.”82

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.”

To this end 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:

80 op.cit. cc108-9WH 81 PQ252059, 16 May 2019 82 CIOT, Why transferring SDLT from the buyer to the seller is not straightforward, 29

July 2019

27 Stamp duty land tax on residential property

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 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-to-lets 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.83

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. 84

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.

83 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.

84 Spending Review & Autumn Statement, Cm 9162, November 2015 p121

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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.

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 …

Figure 1: How to check if a purchase of a property by an individual is liable for the higher rates

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

29 Stamp duty land tax on residential property

higher rates apply. The government is of the view that this is a sufficient period in the vast majority of cases. 85

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.86 In the consultation document the Government also asked for views on how ‘large scale investors’ might be exempted from the new rates of duty.87

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.88 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.89 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.90

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.”91

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 buy-to-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.92

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

85 HM Treasury, Higher rates of Stamp Duty Land Tax (SDLT) on purchases of additional

residential properties, December 2015 para 2.2, para 2.9 86 op.cit. para 2.11 87 op.cit. para 2.19 88 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).

89 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.

90 CIOT press notice, Tax experts urge carve out from stamp duty hike for parents helping their children become first time buyers, 1 February 2016

91 “Paul Johnson’s opening remarks”, IFS Post Autumn Statement briefing, 26 November 2015

92 “Stamp duty switch may hit house prices”, Financial Times, 28 November 2016

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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.”93 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 2016.94

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 buy-to-let investments will be sharply reduced. The uncertainty about how far the Government is prepared to go to discourage buy-to-let 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. 95

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.96 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

93 SP OR 16 December 2015 c34 94 Revenue Scotland publishes guidance on the operation of the charge on their site

(LBTT Additional Dwelling Supplement guidance, March 2016). 95 Treasury Committee, Spending Review and Autumn Statement 2015, HC 638, 12

February 2016 para 120, paras 122-3 96 HC Deb 16 March 2016 c961

31 Stamp duty land tax on residential property

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.97

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.98 It was estimated that the new higher rates would raise £630m in 2016/17, rising each year to £855m by 2020/21.99

At this time HM Revenue & Customs published guidance on the new higher rates for individuals purchasing property.100 This 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:

97 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

98 Budget 2016, HC901, March 2016 paras 1.179-83; pp50-1 99 op.cit. p87 (Table 2.2 – item d) 100 HMRC, Stamp Duty Land Tax: higher rates for purchases of additional residential

properties, updated 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.

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… and summarised the four tests to be met for the higher rates to apply when someone purchased a single property (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.

It also gave more details on the criteria for applying these conditions, and how equivalent rules apply for joint purchases.101

At the time of the Budget the Government also published its detailed response to the consultation. 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.

101 HMRC’s guidance is now part of its online SDLT Manual (from para 09730). 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.

33 Stamp duty land tax on residential property

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 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.102

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 2018.103 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.104

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.105

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.106 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

102 Higher rates of SDLT on purchases of additional residential properties: summary of

consultation responses, March 2016 p6 103 For an overview see, Budget 2016: a summary, Commons Briefing paper CBP7536,

18 March 2016. 104 “Bigger landlords denied release from stamp duty surcharge”, Financial Times, 17

March 2016 105 “Crackdown on buy-to-let will push up rents”, Times, 11 April 2016 106 HC Deb 11 April 2016 cc101-2 see, “Granny annexe tax strikes at the heart of

family values”, Times, 4 April 2016.

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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 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.107

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 self-contained 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.108

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:

107 Public Bill Committee (Finance Bill), Fifth sitting, 7 July 2016 c150 108 op.cit. c151. There were relatively few PQs about this measure, although Members

asked both about the 36 month period, and the treatment of granny annexes: see PQ32467 & PQ33441, 14 April 2016.

35 Stamp duty land tax on residential property

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 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?109

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

109 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.

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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 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.110

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 IFS 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. 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.111

110 Public Bill Committee (Finance Bill), Fifth sitting, 7 July 2016 c153 111 Select Committee on Economic Affairs, Building more homes, HL Paper 20, 15 July

2016, para 234-7

37 Stamp duty land tax on residential property

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.”112

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.113

In his 2016 Autumn Statement the then 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.114 Similarly Mr Hammond made no mention of this issue in his Spring Budget statement in March 2017.115

Initially data on stamp duty receipts did not suggest that the new higher rates had resulted in a major downturn in the market. In March 2017 Treasury Minister Jane Ellison stated, “the latest HMRC data indicates that the revenue generated from the higher rates will exceed what was originally forecast when the policy was announced.”116 In September 2017 HMRC published statistics on duty receipts for the previous year: in 2016/17 £3.4 billion of SDLT was paid on additional property transactions, of which £1.7 billion was attributed to 3% element receipts. This accounted for 39% of residential SDLT receipts.117 Receipts 112 op.cit. para 252 113 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

114 HC Deb 23 November 2016 c902. See also, Autumn Statement, Cm 9362, November 2016 para 3.11-3.

115 HC Deb 8 March 2017 cc809-22 116 PQ67719, 22 March 2017. See also “Buy-to-let investors shrug off new tax”, Times,

29 October 2017; “Buy-to-let landlords shrug off UK tax rise in £1bn Treasury boost”, Financial Times, 31 January 2017.

117 HMRC, UK stamp duty statistics 2016/17, September 2017

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from higher rates on additional dwellings (HRAD) continue to be considerable. HMRC’s most recent figures show that in 2018/19 HRAD receipts were £3.8bn, of which £1.7bn came from the additional 3% element. In this year, additional dwellings transactions accounted for 22% of residential transactions and 46% of residential receipts.118

It is worth noting that 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.”119

In November 2017 the Government announced a number of changes to the higher rates, as part of the Autumn Budget, to “benefit those increasing their share of their own home, families affected by a divorce court order, and cases where properties are held in trust for children subject to Court of Protection orders.”120 Details were given in a tax information note published at this time:

General description of the measure

The measure grants relief from tax due under the higher rates of Stamp Duty Land Tax (SDLT) in certain cases, including where a divorce related court order prevents someone from disposing of their interest in a main residence, and where a spouse or civil partner buys property from another spouse or civil partner, and where a deputy buys property for a child subject to the Court of Protection, and where a purchaser adds to their interest in their current main residence. It also closes down an avoidance route.

The measure also counteracts abuse of relief when someone who changes main residence retains an interest in their former main residence. …

Detailed proposal

Operative date : The measure will have effect for transactions on or after 22 November 2017.

Current law : Schedule 4ZA to the Finance Act 2003 makes provisions to charge the higher rates of SDLT (HRAD).

Proposed revisions : Legislation in Finance Bill 2017-18 will introduce changes to Schedule 4ZA to FA 2003.

Amendments will:

• prevent abuse of relief for replacement of a purchaser’s only or main residence by requiring the purchaser to dispose of the whole of their former main residence and to do so to someone who is not their spouse

• disapply HRAD where an individual buys a property from their spouse or civil partner

118 HMRC, UK Stamp Tax statistics 2018 to 2019, October 2019 p12 119 Forestalling ahead of property tax changes – working paper no.10, October 2016 120 Autumn Budget 2017, HC 57, November 2017 para 3.29

39 Stamp duty land tax on residential property

• disregard certain interests retained by a former spouse or former civil partner upon dissolution of a marriage or partnership. It disregards an interest if it is held under certain `property adjustment orders`, for example in the case of a divorce

• make changes so that a property held by a child’s parents is disregarded when a property is purchased by a child’s trustee pursuant to power conferred on the trustee by a `relevant court appointment, for example such an appointment made by the Court of Protection.121

HMRC’s impact note stated that the Exchequer impact of these amendments would be negligible.

Provision for this was included in the Finance (No.2) Bill 2017 published on 1 December 2017. The clause was debated and approved, unamended, at the Committee stage of the Bill on 18 December. On this occasion Treasury Minister Mel Stride set out its purpose as follows:

Clause 40 brings forward some minor changes to the higher rates of stamp duty land tax for additional properties, which will improve how the legislation works. The changes help in a number of circumstances, including in relation to those affected by divorce or the dissolution of a civil partnership, where they have had to leave a matrimonial home but are required to retain an interest in it, and in relation to the interests of disabled children, where a court-appointed trustee buys a home for such a child.

We will also close down an avoidance opportunity. The Government have become aware of efforts to avoid the higher rates by disposing of only part of an interest in an old main residence to qualify for relief from the higher rates on the whole of a new main residence. This behaviour is unacceptable, and the Government have acted to stop it with effect from 22 November.122

1.6 Autumn Budget 2017: relief for first-time buyers

Budget announcement & first reactions In his Budget statement to the House on 22 November the then Chancellor Philip Hammond announced a new stamp duty relief for first time buyers, as one of a series of measures to boost homeownership:

One of the biggest challenges facing young first-time buyers is the cash required up front. We have put £10 billion more money into Help to Buy: Equity Loan to help those saving for a deposit, but I want to do more still. I have received representations for a temporary stamp duty holiday for first-time buyers, but this would only help those who are ready to purchase now and would offer nothing for the many who will need to save for years. So with effect from today, for all first-time-buyer purchases up to £300,000, I am abolishing stamp duty altogether …

Mr Deputy Speaker, to ensure that this relief also helps first-time buyers in very high price areas like London, it will also be available

121 Stamp Duty Land Tax: higher rates - minor amendments, 22 November 2017 122 HC Deb 18 December 2017 c857. It now forms s40 and Schedule 11 of FA2018.

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on the first £300,000 of the purchase price of properties up to £500,000, meaning an effective reduction of £5,000. That is a stamp duty cut for 95% for all first-time buyers who pay stamp duty and no stamp duty at all for 80% of first-time buyers from today.123

It was estimated that the new relief would cost £125m in 2017/18, rising to £560m in 2018/19.124 Details of this estimate were given in the Treasury’s Policy Costings document:

Stamp Duty Land Tax: abolish for First Time Buyers up to £300,000

This measure provides a full relief from stamp duty land tax (SDLT) for all residential property transactions by first time buyers of a transaction value equal to, or lower than, £300,000. Transactions above £300,000, and up to £500,000, benefit from this relief of £5,000, paying the normal marginal rates of 5% on the portion between £300,000 and £500,000. Transactions above £500,000 do not benefit from the relief. The measure will be effective from 22 November 2017.

The tax base : The tax base is all residential property transactions in England, Northern Ireland and Wales purchased by first time buyers. SDLT is being devolved to Wales in April 2018 and so the tax base does not include Welsh residential first time buyer transactions from 2018-19 onwards. The tax base is based on data from the Council of Mortgage Lenders.

Costing : The costing is estimated by applying the pre- and post-measure tax regimes to the tax base described above. The costing accounts for a behavioural response whereby the volume of affected transactions is increased due to a change in prices.

Exchequer impact (£m)

Areas of uncertainty The main uncertainties in this costing relate to the size of the tax base and the behavioural response.125

Further details of the scope of first time buyers relief (FTBR) were set out in a tax information & impact note published by HMRC:

General description of the measure

From 22 November 2017 first time buyers paying £300,000 or less for a residential property will pay no Stamp Duty Land Tax (SDLT).

First time buyers paying between £300,000 and £500,000 will pay SDLT at 5% on the amount of the purchase price in excess of £300,000, a reduction of £5,000 compared to the amount of SDLT they would have previously paid.

A first time buyer is defined as an individual or individuals who have never owned an interest in a residential property in the United Kingdom or anywhere else in the world and who intends to occupy the property as their main residence.

First time buyers purchasing property for more than £500,000 will not be entitled to any relief and will pay SDLT at the normal rates.

123 HC Deb 22 November 2017 cc1059-60 124 Autumn Budget 2017, HC 57, November 2017 p28 (Table 2.1 – item 5) 125 Autumn Budget 2017: policy costings, November 2017 p6

41 Stamp duty land tax on residential property

The relief must be claimed in an SDLT return. …

Detailed proposal

Operative date : This measure will have effect for transactions with an effective date (usually the date of completion) on or after 22 November 2017.

This measure does not apply in Scotland. SDLT was devolved to Scotland on 1st April 2015. This measure will apply in Wales until 1 April 2018, when SDLT will be devolved to Wales.

Current law : The main SDLT legislation is at Part 4 of the Finance Act (FA) 2003. The current standard rates of SDLT for residential property are set out in table A of section 55 of the Act.

Proposed revisions : Legislation will be introduced in Finance Bill 2017-18 to provide relief for first time buyers. For first time buyers a new set of rates will be substituted at Table A of section 55(1B).

The revised rates and thresholds for residential property purchases worth £500,000 or less by first time buyers will be as follows:

This also gave details of the anticipated impact of the new relief:

Impact on individuals, households and families

The measure will benefit first time buyers of residential properties where the purchase price does not exceed £500,000 saving purchasers up to £5000. Paying no SDLT reduces the upfront cost of buying a home for first time buyers. This measure is expected to lead to a small increase in house prices in the first year after implementation. This measure is not expected to have an impact on family formation, stability or breakdown ...

Impact on business including civil society organisations

This measure is expected to have a negligible impact on businesses. Around 40,000 lawyers and conveyancers, who complete SDLT returns on behalf of purchasers, are expected to incur negligible one-off costs to familiarise themselves with the SDLT rules for first time buyers. The process of automatically calculating the amount of SDLT due will not initially be fully integrated into HM Revenue and Customs (HMRC) online systems.

Where the first-time buyer is being granted a new lease users will need to overwrite the tax due figure on the return. Users can use the calculator on GOV.UK to calculate how much SDLT is due. This is expected to involve negligible additional work. There is no impact on civil society organisations.126

As noted in HMRC’s impact assessment, FTBR would only cover transactions in Wales until April 2018. From this date the Welsh Government’s Land Transaction Tax has been in place, SDLT having been devolved to Wales following the earlier devolution of the tax to 126 Stamp Duty Land Tax: relief for first time buyers – tax information & impact note, 22

November 2017. HMRC also published detailed guidance on the scope of the new relief for home buyers.

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Scotland from April 2015.127 In this context it is worth noting that in December 2017 the Scottish Government announced plans to introduce a relief for first time buyers, setting a higher nil rate threshold for these transactions from its Land and Buildings Transactions Tax. Following a consultation exercise in spring 2018, statutory provision was made for this new relief to apply from 30 June that year.128

Turning back to the Autumn 2017 Budget and the Chancellor’s announcement, there was considerable interest in the numbers of home buyers who stood to benefit from FTBR.129 In addition, Members also raised concerns about the availability of FTBR for purchases of shared-ownership property.

Individuals who buy a property through a shared ownership scheme run by an approved public body can choose, when they purchase a part of the property, to either make a one-off payment based on the market value of the property (‘market value election’), or pay SDLT in stages, each time they buy another share.130 HMRC’s guidance on FTBR made clear that the relief “can only be claimed in respect of the grant of a shared ownership lease or the declaration of a shared ownership trust where “market value” treatment applies”:

In such a case relief applies as usual to the relevant consideration under that treatment. Where “market value” treatment does not apply or has not been opted for, relief cannot be claimed in respect of any of the transactions involved in shared ownership schemes.131

This point has also been made in answers to PQs; for example,

Asked by Stephen Hammond : To ask Mr Chancellor of the Exchequer, what assessment he has made of whether purchasers of shared ownership properties are benefiting from the the stamp duty exemption announced in Autumn Budget 2017; and whether purchasers who opt to stamp duty on the value of the initial share benefit from that exemption.

Answered by: Mel Stride : First-time buyers of shared ownership property who choose to pay SDLT at purchase on the whole market value of the property can benefit from the relief. If the property is worth £300,000 or less, there will be no SDLT to pay. According to Ministry of Housing, Communities and Local Government data, the median shared ownership market value is £220,000. Where market value treatment does not apply, or has not been opted for, the first-time buyers’ relief cannot be claimed. There is already a special SDLT treatment given to purchasers of new shared ownership properties. Purchasers can choose to pay SDLT on the initial portion purchased with a further SDLT charge if they buy the remaining share in the future.132

127 The devolution of SDLT was provided for by the Wales Act 2017, and provision to

introduce the Welsh Government’s Land Transaction Tax was made in 2017. 128 For more details see, Scottish Government, Consultation on LBTT First Time Buyers

Relief, April 2018. 129 PQ124560, 30 January 2018; PQ118031, 11 December 2017. 130 For details see, HMRC, SDLT: Shared Ownership property, ret’d November 2019;

and, HMRC SDLT Manual, from para 27005. 131 HMRC, Stamp Duty Land Tax: relief for first time buyers, 22 November 2017 p10 132 PQ125097, 1 February 2018

43 Stamp duty land tax on residential property

In March 2010 the Labour Government had introduced a stamp duty relief for first time buyers, doubling the nil-rate threshold which applied to this type of house purchase, up to £250,000. Notably when this relief was 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 2012.133 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.”134

The Office of Budget Responsibility mentioned this earlier relief in its commentary on FTBR, suggesting that “the main gainers” would be “people who already own property”:

The Government will introduce a new permanent relief for certain first-time buyers (FTBs) that will reduce stamp duty land tax (SDLT) to zero on properties up to £300,000. A rate of 5 per cent will be charged on the value between £300,001 and £500,000. But FTBs buying a property for £500,001 or more will not benefit from the relief at all, so a purchase at that price would be liable to £5,000 more in SDLT than one at £500,000.

Eligibility criteria match those of the postcrisis ‘stamp duty holiday’, although then the relief stopped at £250,000. HMRC published an evaluation part way through that holiday. It concluded that the majority of the value of relief had fed through to higher house prices and that it “has not had a significant impact in terms of improving the affordability of residential property for FTBs. It is estimated that most of the buyers who benefitted from the relief would have purchased property in its absence anyway (i.e. are deadweight).”a Confirmation that the relief would end was announced alongside the evaluation.

The costing of this measure uses recent mortgage data on FTBs. The proportion of FTBs in all new mortgage lending recently jumped from around 40 to over 45 per cent of all mortgages. This coincided with the introduction of the SDLT surcharge on additional property purchases in April 2016. As with the post-crisis holiday, we have assumed that the consequence of introducing the relief will be to increase house prices – in this case by around 0.3 per cent (see Box 3.1).

The effect on prices of a permanent relief should be greater than a temporary one of equivalent value because it will benefit future FTBs of a property, not just those who buy during the window in which the temporary relief is available. The effect of this reduction in future SDLT costs would be expected to feed through into house prices – to be ‘capitalised’ – relatively quickly. Since the relief frees up FTBs’ savings to put towards higher deposits, these higher prices can be paid. We assume that a temporary relief would feed one-for-one into house prices, but a permanent one will have twice that effect.

On this basis, post-SDLT prices paid by FTBs would actually be higher with the relief than without it. Thus the main gainers from the policy are people who already own property, not the FTBs themselves. For some potential FTBs with smaller deposits, who

133 HC Deb 24 March 2010 c253 134 Autumn Statement Cm 8231 December 2010 p35. For details see, HMRC,

Evaluating the Impact of SDLT First Time Buyer’s Relief, HMRC Working Paper 13, November 2011

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are constrained by loan-to-value lending criteria, the relief will enable them to borrow a multiple of their SDLT saving, allowing them to buy properties that they otherwise could not afford – but more expensively.

There are two other behavioural effects on the public finances that are worth noting.

First, the relief will distort the housing market at prices around £500,000. Chart D shows the jump in the effective tax rate at that price. This will reduce receipts as FTB transactions bunch below the threshold.

Second, it is likely that some FTB purchases will displace purchasers who would have paid more SDLT on the equivalent purchase.

a Bolster (2011): HMRC Evaluating the impact of Stamp Duty Land Tax First Time Buyer’s Relief.135

As noted here, the OBR took the view that FTBR would increase house prices by 0.3%. Nicky Morgan, Chair of the Treasury Select Committee asked the Chairman of the OBR, Robert Chote, about this figure, when he gave evidence to the Committee after the Budget:

Q227 Chair: There was … the suggestion that, in putting that line in and coming up with that 0.3% figure, the OBR had not taken account of all the other changes in the comprehensive housing package that had been announced that day. What was your view on that?

Robert Chote: That is an explicit number for this measure. In terms of what you can incorporate from the other things, there are issues around the speed and certainty, both of implementation and of impact.

With a change like stamp duty, it is in the Government’s power to do this. They can do it quickly, and it is an unusual feature of property taxation like this that you crystallise the long-term impact of the lower tax bill. It shows up crystallised upfront relatively

135 Economic & Fiscal Outlook, Cm 9530, November 2017 pp128-9 (Box 4.3)

45 Stamp duty land tax on residential property

quickly, not instantaneously, in the price, and therefore comes out there.

A lot of the other policy areas, so planning reform and areas where you are attempting to catalyse private sector activity, have the question of it not just being the Government who is the player here. What do local authorities do, etc.? There is a greater uncertainty about the implementation and the impact, at the end of the day. It is also more likely to be later in the forecast period. The Chancellor is perfectly reasonable in saying he would expect this to have some sort of benefit and it moves in the right direction from the perspective of increasing housing supply, but it is the sort of thing where you necessarily have to wait to see this show up in the data, alongside what else is going on in the housing market …

The elasticity that we use, which is what determines the 0.3% as 0.3%, and not larger or less, is a number that we had published beforehand, so I do not think there would have been anything to startle the horses in any of that.136

HMRC’s assessment of earlier relief for first time buyers was also mentioned by the CIOT in their response to the Budget:

The chancellor, Philip Hammond, announced in the Budget that the government would abolish Stamp Duty Land Tax (SDLT) for first-time house buyers on properties worth less than £300,000 effective today (22 November). His speech emphasised the difference between a temporary holiday and a permanent cut.

But the CIOT highlighted a November 2011 report from HMRC which evaluated the introduction of a temporary SDLT relief on transactions between March 2010 and 2012 initiated by the last Labour government. The evaluation concluded that the policy had little effect on improving the affordability of homes, with first-time house buyer transactions ‘around 0-2 per cent higher than they would have been in the absence of the relief’. It also suggested that ‘that the majority of the 1 per cent tax relief was capitalised in higher prices’.

The Institute recognises that the effect of a permanent cut in today’s conditions could be different from that of a temporary cut several years ago. But it called on the government to commit to an evaluation of the policy to ensure that it meets its policy intent of widening access to home ownership for young people in a cost-effective way.137

In their response the Association of Tax Technicians said that it was “particularly pleasing that the change will take effect immediately, otherwise any property chains including a first-time buyer could have found them wanting to delay.” It went on to note that there would be a variety of situations where buyers would not be entitled to relief:

Couples buying together need to be aware that both of them must be first time buyers. If one has owned a property in the UK - or anywhere in the world - before, this will disqualify them from the relief. Individuals buying with help from their parents will also need to take care that if their parent takes a share of the

136 Treasury Committee, Budget Autumn 2017: Oral Evidence, HC 600, 30 November

2017 Qs227, 229 137 CIOT press release, Government research casts doubt on effectiveness of stamp duty

cut, 22 November 2017

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property, and that parent owns or has owned property, this will exclude them from the relief.

Individuals buying in Scotland need to be aware this will not apply to them, as Scottish house purchases are subject to Land and Property Transaction Tax (LBTT) instead of SDLT. It will be interesting to see if any similar changes are made north of the border at the Scottish Budget on 14 December.138

In the IFS’ post Budget presentation, IFS director Paul Johnson noted that house prices could be expected to rise from the introduction of the new relief, but that first-time buyers would still be better off:

The OBR has said that the price faced by first time buyers might rise twice as much as the saving in stamp duty. Stamp duty cuts do lead to price rises. The price rise can be bigger than the duty cut in part because properties are transacted multiple times and in part because of the leverage effect – if I pay £1 less in stamp duty I can put down £1 more deposit, meaning I can obtain a larger mortgage. So the £1 cut allows me to spend more than £1 more on a house.

But this does not mean first time buyers are worse off as a result. They are in general better off. Instead of paying, say, £100,000 for £98,000 worth of house plus £2,000 of tax they might be paying £102,000 for £102,000 worth of house. That’s a better outcome for them.139

In his presentation on the housing measures in the Budget, IFS researcher Robert Joyce also made the point that many first-time buyers would benefit:

Winners and Losers

Many first-time buyers gain, *even if house prices rise by more than their stamp duty falls*

• Housing is an asset: if it’s more expensive to buy, it’s more valuable to hold; but clear gain from paying less stamp duty in process

• Some housing not otherwise in reach will become in reach - larger available deposits secure bigger mortgages

Some FTBs could lose if can’t secure the extra credit to cover higher prices – can’t buy housing they would otherwise have bought

• e.g. because constrained by their earnings level

Existing home-owners tend to gain, but can lose if want to downsize

A large group of young people would have been renting with or without this policy – they are not directly affected.140

In a subsequent commentary piece Mr Johnson noted that by itself increasing the number of homes built would not necessarily lead to an increase in home ownership if those additional properties were purchased by existing home owners. From this perspective FTBR could

138 ATT press release, Relief for first time home buyers – but watch out for the bank of

mum and dad, 22 November 2017 139 “Paul Johnson: opening remarks and summary”, Institute for Fiscal Studies Autumn

Budget analysis 2017, 23 November 2017 140 “Housing measures”, IFS Autumn Budget analysis 2017, 23 November 2017

47 Stamp duty land tax on residential property

be seen along with other tax measures in the last two years to “tilt the playing field towards younger buyers.”141

Initial reactions from the industry appear to have been relatively positive. The Times quoted Lucian Cook, director of residential research at Savills, as saying, “this is very much an ‘every little helps’ measure. It will most benefit people in London and the southeast. It’s not huge in the level of their deposit but it takes the edge off it.”142 The Financial Times commented, “property experts said the reform was likely to boost market activity by reducing the upfront costs of first time buyers, but would not change the underlying issue of high deposit sizes in expensive areas.”143

As with earlier inquiries into the Budget, the Treasury Committee invited evidence from the main professional bodies on the tax measures that had been announced in the Autumn Budget – and specifically, if they met a number of key principles of tax policy: that they should be fair, support growth and competitiveness, certain (i.e. legally clear, targeted and simple), stable, practical, and coherent.144 In their evidence the CIOT suggested that “the tension between the evaluation of the [2010 stamp duty holiday] … and this proposal does underline the need for reliefs of this nature to be properly considered, consulted on and evaluated”:

5.1.2 The measure is framed in similar terms to the temporary relief introduced by Finance Act 2010 for purchases between 25 March 2010 and 25 March 2012, but the new relief is a permanent measure …

[HMRC’s evaluation of the temporary relief] concluded that the policy had little effect on improving the affordability of homes, with first-time house buyer transactions ‘around 0-2 per cent higher than they would have been in the absence of the relief’. It also suggested that ‘that the majority of the 1 per cent tax relief was capitalised in higher prices’. Similarly, a reduction in the up-front costs as a result of this permanent measure will only be realised to the extent that house prices in the market do not rise to reflect the existence of the relief.

5.1.3 Although we acknowledge that a permanent relief may have a different behavioural impact than a temporary reprieve, the tension between the evaluation of the last measure and this proposal does underline the need for reliefs of this nature to be properly considered, consulted on and evaluated.

5.1.4 Recommendation 10 of the CIOT, IoG, IFS Better Budgets: making tax policy better report underlined the need to institutionalise and enable effective timely evaluations of tax measures: ‘The political (and technical) nature of much of tax policy can inhibit effective upfront scrutiny. That places more weight on the importance of effective evaluation, but at the moment this is poorly done. There needs to be effective and routine post-legislative review of whether measures are achieving

141 “If we’re serious about helping young buyers, hard choices lie ahead”, Times, 27

November 2017 142 “Cut to stamp duty ‘will push up prices’”, Times, 23 November 2017 143 “Helping hand for first time buyers will cost £560m”, Financial Times, 23 November

2017; see also, “Stamp duty move ‘a drop in the ocean’”, Financial Times & “Plan for housing is not exactly radical”, Guardian, 23 November 2017

144 For more details see, Treasury Committee, Principles of tax policy, HC 753 of 2010-12, 15 March 2011

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their objectives at an acceptable cost, and Parliament should hold Government to account for this. Data needs to be more accessible to allow outside researchers to evaluate policy’.

5.1.5 The definition of first-time buyer is in line with the definition for the earlier relief and draws on existing SDLT definitions of key terms such as what constitutes a ‘first-time buyer’ and what counts as a ‘dwelling’. However, the application of these definitions in practice continues to provide widespread uncertainty both in their application to SDLT and across the tax system.

There are subtly different definitions of residential property not only within the SDLT code itself but also in other taxes including ATED, investment-regulated pensions, CGT, CGT-related ATED, Business Investment Relief for non-domiciliaries, capital allowances and VAT. The plurality of definitions leads to uncertainty (whether it is possible to read across guidance in one context or tax to another where common terminology is used) and inevitable complexity.

5.1.6 SDLT has become a highly complex tax that has been the subject of technical change in every year since its introduction. The introduction of the higher rates for additional dwellings and dwellings purchased by individuals in 2016 compounded that complexity by requiring that, in the context of a transaction tax, decisions need to be made about the intended future use of the property being acquired. Similarly one of the conditions of the new first-time buyers’ relief is that the purchaser intends to occupy the dwelling as an ‘only or main residence’. The need to make judgements about the future use of property is not readily compatible with a transaction tax and undermines the coherence of the SDLT code.

5.1.7 In terms of routine administration, the brunt of this complexity is borne by conveyancers who generally complete SDLT returns but who may not have appropriate tax expertise.

5.1.8 This measure therefore scores poorly in relation to stability and practicability, but on balance we have scored the overall measure as amber, recognising that this is possibly on the over-generous side if previous experiences set out above are borne out.145

The Association of Chartered Certified Accountants also scored this measure ‘amber’ on most of these criteria:

In addition to the significant economic impact, this measure is part of a clearly targeted suite of measures (including non-tax items) designed to invigorate the UK housing market. While much has been made of the marginal cost of each additional household moved from rental to property ownership, this perhaps serves to reinforce the long term value put on enabling first time buyers to make that change. With this in mind, the inevitable additional complexity of the measure is arguably outweighed by the long term distributional impacts and wider societal benefits, especially within the context of the accompanying supply side measures around building and ‘buy-to-rent’ activities.146

The Institute of Chartered Accountants was more critical, arguing that an overall review of the taxation of property was long overdue:

145 Treasury Committee, Budget Autumn 2017: CIOT Written Evidence (TAB0004),

December 2017 pp9-10 146 Budget Autumn 2017: ACCA Written Evidence (TAB0005), December 2017 p5

49 Stamp duty land tax on residential property

Stamp duty land tax (SDLT) changes for first time buyers were anticipated, but the extent of the abolition was surprising … The SDLT changes are part of a whole package of announcements designed to increase the housing stock and give help to younger buyers. This particular change comes at a significant cost while the new supply of housing which is also being supported in this Budget will not be available for some years, so it will be interesting to see whether it achieves its objective or whether it merely increases house prices.

The boost for first time buyers is welcome but it is another bolt on to the taxation of property which has been compiled in bits and pieces over several years with no coherent policy running through it and we have long called for an overall review.147

The Committee took evidence from all three organisations on 5 December. Alison McGovern asked witnesses if they had a view of the new stamp duty relief. Frank Haskew (Head of Tax Faculty, Institute of Chartered Accountants in England and Wales) replied as follows:

Frank Haskew: Very briefly, the measure reflects the fact that when stamp duty land tax was introduced, the rates had been slowly going up.

We are now faced with a position whereby the actual SDLT on land transactions is potentially quite high and clearly a barrier. The Government have now adopted measures to try to alleviate that.

However, the jury is out on whether it will work in practice. There was a report back in 2011 when there was a stamp duty holiday then, which suggested that in fact prices just moved to accommodate it. It remains to be seen whether property pricing will remove or negate some of this benefit to people.

However, Scotland already has, and Wales is going to have, its own land transactions tax. Here we are adopting measures unilaterally within the UK in terms of trying to help people, when effectively it has been devolved to the other parts of the UK, so it will be interesting to see how that pans out as well.

On the face of it, it is encouraging first-time buyers, but there is now a huge amount of complication with SDLT, which there never used to be 30 years ago when it was just stamp duty of 1%, and the measure is effectively a response to the fact that the rates have become very high and the tax has become very complicated and a significant barrier to transactions.148

As part of its inquiry the Committee also took evidence on the Government’s housing policy. On this occasion Alison McGovern asked Brian Berry (Chief Executive of the Federation of Master Builders) “from the point of view of the industry, would you agree with the OBR’s conclusion that the main gainers from the stamp duty policy are people who already own properties, rather than first-time buyers?”

Brian Berry: Anything that encourages young people to come into the housing market is welcome, and the evidence from our members has been positive. Help getting a deposit for a home—the extra £5,000 that could be made available to a young person—is favourable, but the problem is not the demand for new housing but the supply side, which needs to be tackled.

147 Budget Autumn 2017: ICAEW Written Evidence (TAB0006), December 2017 pp6-7 148 Budget Autumn 2017: Oral Evidence, HC 600, 5 December 2017 Q277

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We see the abolition of stamp duty for first-time buyers as a positive move to help more people come into the housing market, but the fundamental problem is increasing the supply. Otherwise, we are putting too much emphasis on the demand side, which is already there, and not enough on the supply side. Unless we have an increasing supply of housing, house prices will remain high now and in the foreseeable future.149

In answer to an earlier question Nick Forbes (Vice-Chair of the Local Government Association) said, “the LGA would argue, quite straightforwardly, that there is a political choice around stamp duty. The £3.2 billion that it will cost to raise the stamp duty threshold could have been deployed towards developing more units, but the Government have chosen not to do that.”150

The Committee took evidence from the Chancellor on 6 December, and the introduction of the new first-time buyers’ relief was one of the tax measures which was raised. Alison McGovern asked Mr Hammond about the OBR’s analysis of the impact of the new relief:

Alison McGovern: ... The OBR gave some commentary on [the changes to stamp duty] … that was quite clear and robust … Was the OBR’s commentary replicated by internal Treasury advice?

Mr Hammond: The OBR’s analysis did not surprise me, but the OBR’s analysis is what it is. It assumed no supply-side reform of the housing market, and the OBR has chosen not to model any consequences of the broader housing package that we announced. The OBR commentary that you are referring to answers a question. If you abolish stamp duty for first-time buyers in the absence of any other measure, what will the consequences of that be? I do not disagree with its analysis on the basis of that narrow point.151

Ms McGovern went on to ask the Chancellor as to whether the new relief was cost effective:

Alison McGovern: … This policy is really quite expensive, is it not, Chancellor? By 2021-22, it is £640 million a year in year … For a country that is seeing child poverty rise, is giving money to people who already own homes really the right choice?

Mr Hammond: No, this is giving money to first-time buyers … Paul Johnson [of the IFS] drew the distinction between money that is paid in a tax and money that is spent on a more valuable asset. He said that a buyer who spends £2,000 more on their home, but that £2,000 is represented in the value of their home, is better off than a buyer who spends £2,000 on a tax, which simply goes to the Treasury.

Alison McGovern: Across the course of their life, sure, but right now, today, we are facing child poverty. I am asking you whether this is really the right priority for now.

Mr Hammond: Let me just take you through my logic around the way we deal with the housing market.

We can only address affordability by improving supply of housing. That is the route we have committed to. Equally, the housing

149 Budget Autumn 2017: Oral Evidence, HC 600, 28 November 2017 Q37 150 op.cit. Q35 151 Budget Autumn 2017: Oral Evidence, HC 600, 6 December 2017 Qs323-4

51 Stamp duty land tax on residential property

market plays a very important role in our overall financial economy. Housing is the most important financial asset of most people in this country. Therefore, the challenge here is to improve the affordability of housing as quickly as possible without damaging the housing market in a way that challenges financial stability. That is quite a precise path. I am clear that the trajectory to improved affordability will necessarily be quite a slow path.

In the meantime, it will be necessary for us to continue to provide demand-side support to allow people who would otherwise be excluded from the market to get into the market. The measures we took at the Budget to support first-time buyers were a part of that. The continuation of help to buy equity loan until 2021 was another important part of that process. It is about aspiring to reach a point where housing becomes more affordable and genuinely available to people who would expect to be able to access the housing market while, in the short term, in the interim period, providing some continued support on the demand side.152

The Committee published its report on the Budget on 22 January, and on this issue argued that “there needs to be a step change to helping first-time buyers purchase a home”:

93.The changes to Stamp Duty Land Tax (SDLT) in the Budget helps first-time buyers by reducing the sum of money needed to save to purchase a house. However, the OBR forecasts that just 3,500 additional first-time buyers over the forecast period will enter the market as a result of the policy change, at a cost of £3.2 billion. There needs to be a step change to helping first-time buyers purchase a home.

94.The OBR forecasts that a permanent reduction in SDLT in isolation will increase the affected first-time buyer house prices by double the reduction in SDLT. The previous ‘Stamp Duty Holiday’, which was in operation from March 2010 to March 2012, was found by HMRC not to have increased affordability, and to have resulted in an increase in the number of first-time buyers of “between zero and two per cent”.

95.The new SDLT schedule creates a cliff edge at the £500,000 price point, which will create distortions to the housing market. A house worth £500,000 will attract £5,000 less in SDLT than a house worth £500,001. When the previous Government redesigned SDLT to remove ‘cliff edges’ faced at certain property values, the then Chancellor said that he had reformed a “badly designed system that has distorted our housing market for decades”. It is regrettable that the abolition of SDLT for first-time buyers reintroduces a cliff edge into the SDLT schedule.

96.The eligibility for SDLT relief for first-time buyers being extended to houses worth up to £500,000 recognises that previous measures aimed at first-time buyers such as the Help-to-Buy ISA (which were capped at £450,000) excluded some parts of the country. The Committee notes such a recognition.

97.The only sustainable way to address housing market affordability, both for first-time buyers and other households, including those in the rental sector, is to significantly increase the supply of new housing. The Autumn Budget alone is unlikely to achieve this.153

152 Budget Autumn 2017: Oral Evidence, HC 600, 6 December 2017 Qs329-30 153 Budget Autumn 2017, 22 January 2018, HC 600 of 2017-18 p29

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In turn the Chancellor wrote to the Committee a few days after the report’s publication; an extract is reproduced below:

Where the report says that "just 3,500 additional first-time buyers over the forecast period" will enter the market as a result of the change, this is inaccurate. The 3,500 figure is the OBR's estimate of the annual number of additional first-time buyer purchases which will displace other property transactions, such as purchases of additional properties. Of course, the number of first-time buyers who will benefit from the change is far higher than this estimate, and we expect the relief to help over a million first-time buyers getting onto the housing ladder over the next five years …

I also noted the report's discussion of the potential impact of the relief on house prices. It is important that this is considered in the wider context of the large package of measures to improve the housing market, including at least £44 billion of support for housing over the next five years. This is not accounted for in the OBR housing supply forecast, which they are keeping under review as the policies are delivered.

Initial reactions from industry have also suggested the SDLT relief will play a role in supporting supply, including from the Home Builders Federation, who have said it will give builders the confidence to invest in the coming years.154

Finance Bill 2017-19 Provision for FTBR was included in the Finance (No.2) Bill 2017 (specifically clause 41 of the Bill). The clause was debated and approved, unamended, at the Committee stage of the Bill on 18 December. On this occasion Treasury Minister Mel Stride made the case for the new relief as follows:

The Budget announced an ambitious package of new policies to tackle the housing challenge, including planning reform; spending; and a new agency, Homes England, to intervene more actively in the land market. Together with the reforms in the housing White Paper, the housing package announced in the Budget means that we are on track to raise annual housing supply … to 300,000 a year on average by the mid-2020s …

However, it will take time to build these new homes, and the Government want to act now to help those young people who are aspiring to take their first step on to the housing ladder. That is why the Bill permanently abolishes stamp duty for first-time buyers purchasing a property for £300,000 or less. First-time buyers purchasing a house that is between £300,000 and £500,000 will save £5,000. To ensure that this relief is targeted at those who need it most, purchases above £500,000 will not benefit from the relief …

This relief will help over 1 million first-time buyers … during the next five years … Over 95% of first-time buyers who pay stamp duty will benefit by up to £5,000, including 80% of first-time buyers in London. That means that over 80% of first-time buyers will pay no stamp duty at all, and it saves the buyer of an average first property nearly £1,700.155

154 Treasury Committee, Letter from the Chancellor of the Exchequer relating to Stamp

Duty Land Tax, 27 January 2018 155 HC Deb 18 December 2017 c855, c857

53 Stamp duty land tax on residential property

Speaking for the Opposition Jonathan Reynolds argued that without further measures to increase housing supply, “stamp duty land tax cuts risk further inflating a housing bubble that is snatching the idea of home ownership out of reach for the younger generation”:

The one headline-grabbing move that the Chancellor made in the autumn Budget was the abolition of stamp duty land tax for first-time buyers up to the value of £300,000. I acknowledge that this was a Labour policy included in our manifesto for the June 2017 general election, but we were very clear in that manifesto that the measure should be proposed only if there were accompanying measures to increase supply …

Conservative Ministers’ review of a previous stamp duty cut concluded that the tax relief, in itself, had “not had a significant impact on improving affordability for first time buyers.”

That is why Labour has tabled an amendment calling for the publication of a review prior to the 2018 Budget on the impact of the relief on first-time buyers, including its effect on house prices and the supply of houses.156

During the debate Alison McGovern argued that the benefit of the new relief was strongly skewed to only certain parts of the country:

In proposing the stamp duty land tax cut, the Government have admitted that they have no further ambitions to rebalance our economy between the regions, and no further ambitions to tackle the disgraceful inequality between different parts of the country. In the north-west and the north-east, house prices have grown barely at all, whereas in the south-west, for example, they have shot up and wages have been held disgracefully low. This policy gives money to those who already have assets. It is a charter for inequality, and if it is ever to be implemented, it should not be implemented now.157

In response Mr Stride said “it is notable, and equally lamentable, that this particular policy, which predominantly assists the young, appears to be something that the Labour party rejects and indeed derides.”158

In the event the House adopted the clause without a division, but voted on the Opposition’s new clause to require the Government to review the impact of the new relief prior to the Autumn 2018 Budget. This was defeated by 313 votes to 226.159

Initial evidence of impact HMRC published quarterly statistics on SDLT receipts on 26 April, which showed that 69,000 first-time buyers had benefited from the new relief.160 Treasury Minister Mel Stride gave a statement to the House on the publication of the figures, noting that the 69,000 figure “represents

156 op.cit. c859-860. During the election campaign the Labour Party published, Labour’s

New Deal on Housing (April 2017), which stated that in government the Party would, “cut stamp duty to zero for first-time buyers buying their first home up to a maximum value of £330,000, for a two year period” (p6).

157 op.cit. c866 158 op.cit. c875 159 op.cit. cc876-8. This provision now forms s41 of FA2018. 160 HM Treasury press notice, 69,000 households benefit from cut in stamp duty, 26

April 2018

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nearly 20% of all residential transactions, and it is broadly in line with the official estimate at autumn Budget 2017.”161

Speaking for the Opposition Anneliese Dodds argued that the new relief failed to deal with the fundamental weakness to the Government’s housing policy, “an inability to increase the supply of genuinely affordable housing.” On the new relief, Ms Dodds asked if the Minister “has commissioned research into the impact of this flagship measure on prices, in the absence of decisive measures to increase affordable supply.” In response Mr Stride said the following:

The Chancellor made it clear at Budget that a further £15 billion would be made available, taking us up to £44 billion over the next five years, to drive up the supply of new homes. That is alongside planning changes and the review that my right hon. Friend the Member for West Dorset (Sir Oliver Letwin) is undertaking to ensure that where planning permission is granted, houses are actually built. I suggest that we look at our record.

Last year there were 217,000 new properties in this country, which is the largest figure since 2005-06. That indicates that our move towards having 300,000 more properties on the market by the middle of the next decade is realistic.

The hon. Lady asked specific questions about the effect of stamp duty relief on house prices, and she will know that the OBR forecast a small impact of 0.3%. She will also know that that projection did not take into account the various supply-side measures that I have mentioned, and other measures that we have undertaken.162

Budget 2018: FTBR & shared ownership In his 2018 Budget speech on the 29 October the Chancellor announced a minor reform to FTBR:

In last year’s Budget, I launched a five-year, £44 billion housing programme to deliver the biggest increase in housing supply since 1970, and I abolished stamp duty for first-time buyers on properties up to £300,000. Some 121,500 first-time buyers have already benefited from our new relief, and the number of first-time buyers is at an 11-year high. Today, I am extending that relief to all first-time buyers of shared ownership properties valued up to £500,000, and I will make the relief retrospective so that any first-time buyer who has made such a purchase since the previous Budget will benefit.163

Someone buying a property through a shared ownership scheme can pay SDLT in two ways: they may either make a one-off payment based on the market value of the property (‘market value election’), or, pay SDLT in stages.164 When FTBR was introduced, HMRC’s guidance on the scope of the relief underlined that buyers were eligible to claim if only if “you elect to be taxed on the market value of the property and that market value does not exceed £500,000”:

161 HC Deb 26 April 2018 c1047 162 op.cit. cc1048-50 163 HC Deb 29 October 2018 cc663-4 164 An outline of the rules is on Gov.uk. HMRC’s online Stamp Duty Land Tax Manual

has more details – see from para 27005.

55 Stamp duty land tax on residential property

Relief can only be claimed in respect of the grant of a shared ownership lease or the declaration of a shared ownership trust where “market value” treatment applies. In such a case relief applies as usual to the relevant consideration under that treatment. Where “market value” treatment does not apply or has not been opted for, relief cannot be claimed in respect of any of the transactions involved in shared ownership schemes.165

This measure was confirmed in the Budget report, which stated that the estimated cost of this measure in 2019/20 would be £5m.166

Further details of this change, and its impact, were given in HMRC’s tax information and impact note:

The relief for first time buyers will be extended to purchasers of qualifying shared ownership properties who do not elect to pay Stamp Duty Land Tax (SDLT) on the market value of the whole property when they purchase their first share.

The relief will apply retrospectively from 22 November 2017, meaning that a refund of tax will be payable for those who have paid SDLT after the 22 November 2017 in circumstances which now qualify for First Time Buyers’ Relief.

Relief will be applied to the first share purchased, where the market value of the shared ownership property is £500,000 or less.

First time buyers will pay no SDLT where they are paying £300,000 or less for the first share. Those paying between £300,000 and £500,000 for their first share will pay SDLT at 5% on the amount in excess of £300,000, a reduction of up to £5,000 compared to the amount of SDLT they would have previously paid. The relief will also apply to any SDLT due on the rental payments. The relief will not apply to the purchase of any further shares in the property. First time buyers purchasing a shared ownership property whose market value is more than £500,000 will not be entitled to any relief and will pay SDLT at the normal rates, in line with the treatment for other first time buyers. …

The amendment window for those who completed their transaction before 29 October 2018 will be extended by a further 12 months until 28 October 2019. …

Exchequer impact (£m)

…

Impact on individuals, households and families

The measure will each year benefit around 1,700 first time buyers of residential properties purchasing through a qualifying shared ownership scheme where the market value of the property does not exceed £500,000 saving purchasers up to £5,000. Paying no

165 HMRC, SDLT relief for first time buyers guidance note, November 2017 p14, p10.

Prior to the 2018 Budget there appears to be very little mention of this issue; for example, PQ146185, 25 May 2018.

166 Budget 2018, HC 1629, October 2018 para 3.39, Table 2.1 – item 37

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or less SDLT reduces the upfront cost of buying a home for first time buyers.167

At this time HMRC updated their guidance on FTBR, and this provides chapter and verse on the extension of relief …

Shared ownership

Relief may be claimed in respect of the grant of a shared ownership lease, whether the purchaser makes a market value election or chooses to pay SDLT in stages. … Where the relief is claimed the SDLT rates for first time buyers will apply as follows:

Market Value Election

Where a market value election is made, the SDLT rates for first time buyers apply to the relevant consideration under that treatment. Where the relief is claimed, no SDLT will be due on any rent paid under the lease. A market value election can only be made at the time the initial lease is granted by the scheme provider. Once made an election cannot be withdrawn.

Example: A first time buyer pays £155,000 for a 50% share in a shared ownership property with a market value of £310,000. A market value election is made, with SDLT being due on the total market value of £310,000. As the relevant consideration (i.e. the market value of the property) is below £500,000 first time buyers’ relief can be claimed. If relief is claimed, the purchaser will pay SDLT at 0% on the first £300,000 and 5% on the remaining £10,000, paying a total of £500 in SDLT. No further SDLT will be due on any further shares purchased or if the buyer goes on to purchase the property outright. No SDLT is payable on the rental payments.

Paying SDLT in Stages

Where the purchaser chooses instead to pay SDLT in stages, the SDLT rates for first time buyers will apply to the actual consideration (the premium) paid for the initial share purchased. To be eligible for the relief, the market value of the property as referenced in the lease must be £500,000 or less. Where the relief is claimed no SDLT will be payable on the rental payments. The relief applies only to the first transaction, when the lease is granted by the scheme provider.

Example: A first time buyer pays £150,000 (the premium) for a 40% share in a property with a market value of £375,000. The purchaser decides to pay SDLT in stages. As the market value of the property is below £500,000 the SDLT rates for first time buyers apply. no SDLT will be due on the £150,000. SDLT may be due on the rental payments, but as first time buyers’ relief is being claimed, the relief also applies to the rental payments, therefore no SDLT is due on this transaction.

Staircasing transactions

The relief for first time buyers does not apply to subsequent transactions where the purchaser, after being granted the lease, purchases further shares in the property (commonly referred to as “staircasing’’). Any staircasing transaction will not lead to the withdrawal of the relief claimed on the grant of the lease, even if the total paid for all the transactions exceeds £500,000. Where no market value election is made, no further SDLT will be due until

167 HMRC, Stamp Duty Land Tax: First Time Buyers' Relief - extension of relief to all

purchasers of qualifying shared ownership property 2018, 29 October 2018

57 Stamp duty land tax on residential property

the purchaser increases their ownership share in the property over 80%. Here the normal rules for shared ownership, including the standard SDLT residential rates and method of calculation, apply to the transaction that takes the purchaser’s ownership share over 80% and any subsequent staircasing transactions.

… and the circumstances under which purchasers may make a claim for retrospective relief:

As the extension of the relief will apply retrospectively from 22 November 2017, a refund of tax can be claimed if the effective date of the purchase was on or after the 22 November 2017 and a return has been submitted and SDLT paid in circumstances which now qualify for first time buyers’ relief. Claims for refunds must be made in writing to HMRC … with relevant details of the transaction …

If a market value election was made and first time buyers’ relief claimed the election cannot be withdrawn. However, an amendment to the return to reclaim any SDLT paid on the rent can be made. The normal time limit for amending a return has been extended. Claims for refunds must be made no later than 28 October 2019.168

There was relatively little comment on this measure, although it was mentioned as part of the Treasury Committee’s inquiry on the Budget.

In their evidence on the Budget’s tax measures, the Institute of Chartered Accountants stated, ”the boost for first time buyers is welcome, but it is another bolt on to the taxation of property which has been compiled in bits and pieces over several years with no coherent policy running through it and we have long called for an overall review.”169 When the Committee took evidence from IFS director Paul Johnson, Colin Clark asked for his view as to why the measure had been applied retrospectively:

Paul Johnson: I don’t know, but my guess is it was because they just felt they had made a mistake in the first place. As I understand it, you had a choice about when you paid stamp duty on these shared ownership properties. You could pay it all up front, in which case you got the relief, or you could pay bits as you go along, in which case you did not. They are doing this such that you get the relief if you are just paying a little bit to start with...

Q114 Colin Clark: … Does it make sense to give money retrospectively to householders? From what you are saying, Mr Johnson, it affects very few people and it is a correction rather than—

Paul Johnson: That is my understanding of it. It is a fairly complex bit of the tax system, but my guess is that if you had asked the Chancellor, he would say that this was to make up for an unintended inequity in what happened before.170

Provision to this effect was made by ss41-2 of the Finance Act 2019. In addition section 43 of the Act made two minor changes to the operation of the higher rates for additional dwellings (HRAD); to extend 168 SDLT relief for first time buyers - guidance note, October 2018 pp10-12 169 Treasury Committee, Budget 2018: Written Evidence, 5 November 2018 p12 170 Treasury Committee, Oral evidence: Budget 2018, HC 1606, 1 November 2018

Qs112-4

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from 3 months to 12 months the time allowed to amend a tax return relating to HRAD for those who sell their old home more than 12 months after they buy a new home, and, to clarify the meaning of `major interest` in land for the general purpose of HRAD.171 Although all three provisions were among those in the Finance Bill selected for debate at the beginning of the Bill’s scrutiny by the Committee of the Whole House, they were debated and agreed on the with little substantive comment.172

In October 2019 HMRC published its most recent annual figures on SDLT receipts, which included figures on the take-up of FTBR in its first full year:

218,900 transactions benefited from first time buyers’ relief (FTBR) in 2018-19. … The total amount of SDLT relieved due to FTBR in 2018-19 was estimated at £521 million. London and the South East accounted for £256 million (49%).

The mean average amount relieved per transaction was £2,400. London had the highest average relief at £4,300 and Northern Ireland had the £ lowest at £800. This reflects the different house prices in these regions.

19% of all FTBR transactions were in the South East, while London and the East of England both accounted for 13%. Of the local authorities, Birmingham had the highest number of claims and Bristol had the highest total amount relieved.173

1.7 Budget 2018: SDLT and non-residents In the Conservative Party Conference in October 2018 the then Prime Minister Theresa May announced plans for “a higher rate of stamp duty on those buying homes who do not live and pay taxes in the UK, to help level the playing field for British buyers”, adding “the money raised will go towards tackling the scourge of rough sleeping.”174

No further details were given at this time, although there was some commentary on the proposal. Writing in the Tax Journal, Andrew Hubbard suggested the proposal “would almost certainly be discriminatory under European Law and therefore could only ever be introduced post-Brexit.” Mr Hubbard went on to note a number of practical issues, such as whether the residence of the buyer should be the relevant test for applying a higher rate:

Any rental income from a property in the UK is chargeable to income tax regardless of the residence status of the owner, and non-residents are now charged capital gains tax on the disposal of UK domestic property. So, the tax playing field for property is now level between residents and non-residents and there doesn’t seem

171 HMT, Overview of Tax Legislation & Rates, October 2018 para 1.48. These

amendments are expected to have a negligible Exchequer impact (HMRC, SDLT: higher rates for additional dwellings - minor amendments, 29 October 2018).

172 HC Deb 19 November 2018 cc594-690 173 HMRC, UK Stamp Tax statistics 2018 to 2019, October 2019 p14 174 Conservative Party, Prime Minister’s speech: Our future is in our hands, 3 October

2018

59 Stamp duty land tax on residential property

to be a great deal of logic in making tax residence the test for the higher rate of SDLT.175

The then Chancellor Philip Hammond did not cover this issue in his Budget speech later that month,176 although the Budget report confirmed that the Government would consult “on a SDLT surcharge of 1% for non-residents buying residential property in England and Northern Ireland.”177 This consultation was launched in February 2019 and closed in May. The Government’s purpose in introducing this extra SDLT charge was set out in the summary to the consultation document:

Action has already been taken by the government to support homeownership by making changes to SDLT including:

• the introduction in April 2016 of the higher rates of SDLT on additional dwellings (referred to as ‘the higher rates’), and

• the introduction of first time buyers’ relief at Autumn Budget 2017.

But there is evidence that purchases of property by non-UK residents is pushing up house prices for UK residents.

That is why at Budget 2018 the government announced it would consult on the introduction of an SDLT surcharge on non-UK residents purchasing residential properties in England and Northern Ireland. The surcharge will apply to purchases of residential property made by non-UK resident individuals and non-natural persons including companies, trusts and partnerships.

The surcharge will apply to freehold and leasehold purchases and will be at a rate of 1% on top of existing SDLT rates, including the rates applicable to the rental element of leasehold property. It will apply to purchases of residential property which for the purposes of this charge means dwellings … There will be reliefs from and refunds of the surcharge in certain circumstances where the government considers imposing a tax charge is not in line with the overall policy intention.178

The paper does not refer to the risk that a higher charge on non-residents might be considered contrary to EU law, nor to the prospects of the UK leaving the EU.

With regards to individuals, the consultation proposes a simple residence test …

The residence test for individuals

The government is proposing to treat individuals as non-UK resident for the purposes of the surcharge if they spent fewer

175 “Could an increase in stamp duty for non-UK residents work in practice?”, Tax

Journal, 5 October 2018. See also, “Stamping on foreigners”, Taxation, 25 October 2018.

176 In evidence to the Treasury Committee after the Budget, Mr Hammond simply noted the previous announcement of “an additional supplementary Stamp Duty Land Tax charge on residential property bought by non-UK residents” (Budget 2018: Oral Evidence, HC 1606, 5 November 2018 Q323).

177 Budget 2018, HC 1629, October 2018 para 3.39 178 HMT/HMRC, Stamp Duty Land Tax: non-UK resident surcharge consultation,

February 2019 p2

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than 183 days in the UK in the 12 months ending with the date the transaction occurs.179

A person will be deemed to have spent a day in the UK if they are here at the end of a day (midnight). Although SDLT is only payable on property or land purchased in England and Northern Ireland, for the purposes of the SDLT residence test it is days spent in the whole of the UK that will be relevant, not just days spent in England or Northern Ireland.

The government proposes that where an individual who has been subject to the surcharge spends 183 days or more in the UK in the 12 months following the effective date of the transaction, they will be eligible for a refund of the surcharge … There are special rules where there are joint purchasers of a property…

The proposed residence test for individuals is intended to be as simple as possible for taxpayers and conveyancing solicitors to apply, in recognition of the fact that most people buying homes will not use a professional tax adviser.

The government considered several alternative tests for what constitutes a non-UK resident individual for the surcharge. One option was to use the existing Statutory Residence Test (SRT). However, the SRT is a complex piece of legislation, involving several interconnected tests which consider closeness of connection to the UK as well as periods of time spent in and out of the UK.

Moreover, the SRT time-based tests determine the residence status of an individual by reference to periods spent in the UK over the course of a tax year. The nature of SDLT as a tax which falls upon the completion of a transaction means the SRT, without adaptation, would be poorly suited to be applied to SDLT for which the concept of “tax year” is not relevant. The government decided against using the SRT for the reasons set out above, as using the SRT would not be compatible with the principle of making this surcharge as simple to apply as possible.

… and gives an example of how this would work in practice:

Example 1 John purchases a freehold residential property in England on 1 August 2025 for £500,000. John is neither a first-time buyer, nor does he already own another property so first-time buyers’ relief and the higher rates on additional dwellings do not apply to him. Between 2 August 2024 and 1 August 2025 John spent 275 days outside the UK. He is therefore classed as non-UK resident according to the test set out above and the surcharge applies.

His SDLT liability is therefore calculated as follows:

• 1% up to £125,000 = £1,250

• 3% of £125,000 to £250,00 = £3,750

• 6% of £250,000 to £500,000 = £15,000

His total SDLT liability is therefore £20,000.

If John spends 183 days or more in the UK in the 12 months following 1 August 2025, he will be eligible for a refund of the surcharge.180

179 This is normally referred to as “effective date of the transaction” for SDLT purposes. 180 HMT/HMRC, Stamp Duty Land Tax: non-UK resident surcharge consultation,

February 2019 pp4-5

61 Stamp duty land tax on residential property

The consultation paper did not give a timetable for the introduction of this new charge, nor any estimate of the amounts it might raise. In answers to PQs about the charge, the Government has simply stated, “once the consultation closes, the government will analyse responses and publish its response. The responses to the consultation and any further evidence emerging from the consultation process will inform the final policy design and accompanying Impact Assessment.”181 It has also confirmed that, “a costing for how much the surcharge will raise will be produced at a future fiscal event once the final design of the surcharge has been confirmed. This costing will follow the usual process for analysing the revenue impacts of new tax measures, including being subject to scrutiny from the Office for Budget Responsibility.”182

To date the Government has not given any further details of the outcome of the consultation, although several stakeholders have published the responses they made.

In their response the CIOT raised concerns as to whether there was sufficient evidence on the causes for house price inflation for this type of surcharge:

The consultation points to evidence that purchases of property by non-UK residents are inflating house prices for UK residents. The source of this evidence is not set out in the consultation document.

However, the following links to evidence have been provided by HMT as part of the consultative meetings:

• Filipa Sá (Department of Political Economy, King’s College London), The Effect of Foreign Investors on Local Housing Markets: Evidence from the UK, June 2017

• Alison Wallace, David John Rhodes & Ricard Webber (Centre for Housing Policy, University of York), Overseas investors in London's new build housing market, Greater London Authority, 2017

The economic and demographic analyses are outside our remit. However, we make the following observations. The assessment of the economic effect of the surcharge in terms of house price inflation should be considered from the supply side as well as demand including the effects on the supply of new homes, (particularly affordable housing) and the build to rent sector in terms of forward funding by overseas buyers. The research above, published in June 2017, inevitably considers data based on earlier transactions. The effect of Brexit and changes to the taxation of residential property are unlikely to be fully reflected in the data.

The higher rates of SDLT for purchases of additional residential property and first time buyers’ relief in 2017 were also part of the government’s policy of supporting home ownership. As set out in the tax policy making process paper183 … the government recognises the critical need to monitor and evaluate tax policy. It seems appropriate therefore that previous SDLT measures should be evaluated as a precursor to introducing the new surcharge that will apply as an extra layer on top of those existing rates. In

181 PQs 234167-177, 27 March 2019 182 PQ HL17739, 9 September 2019. See also PQs 3582 & 4282, 28 October 2019 183 HMT, The new Budget timetable and the tax policy making process, December 2017

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addition, a policy measure aimed at house price inflation should be evaluated in the context of other recent taxation changes affecting non-UK resident purchasers including the restriction on deductibility of interest, the introduction in 2015 (and extension in 2019) of non-resident capital gains tax and the extension of the inheritance tax relevant property regime to non-UK companies owning residential property in 2017. The full impact of these measures is yet to be seen.184

It went on to ask whether a surcharge based on non-residence would, in fact, be contrary to EU law:

We raise the possibility of these proposals being contrary to EU law.185 This is because the surcharge would mean that the SDLT rules treat non-UK residents differently to UK residents in respect of identical transactions involving residential property in England and Northern Ireland.

It is accepted that the EU fundamental freedoms can be restricted if there is a justification for doing so, the measure is proportionate and is reasonably necessary to achieve the stated aim. The policy aims of this measure are around housing policy and a stated aim is to help to control house price inflation.

We understand that it is the government’s view that the implementation of the surcharge would not breach any EU law fundamental freedoms, on the grounds that it is justifiable and proportionate in relation to giving effect to the government’s housing policy, so it could be implemented before the UK leaves the EU.

We cannot easily see that this proposed measure is justifiable or proportionate in relation to housing policy. Thus we consider that the surcharge could be liable to challenge under EU law.

We have considered the case of Staatssecretaris van Economische Zaken and another v Q [2015] STC 2196 where it was held to be legitimate to have a national focused heritage exemption. However, in that case the discrimination related to the situs of the land rather than the residence status of the taxpayer. The proposed difference in treatment if the surcharge is implemented would appear to us to undermine the relevant freedoms and we are not immediately aware of any cases that support the conclusion that it would be considered justified or proportionate.186

In their response the Association of Tax Technicians raised concerns that the proposals as drafted “will affect families already living in the UK where one of the purchasers works abroad, as well as situations where individuals are seeking to return to the UK and wish to make plans more than six months in advance”:

184 CIOT, SDLT: non-UK resident surcharge - CIOT response, 3 May 2019 p3. The GLA’s

2017 report, cited here, and the wider debate regarding foreign ownership, is discussed in, Foreign Investment in UK Residential Property, Commons Briefing Paper CBP7723, 17 July 2017.

185 We understand that it is still government policy that the UK should leave the EU on the basis of the Withdrawal Agreement negotiated between the EU and UK and finalised on 14 November 2018. If the Withdrawal Agreement is approved by Parliament and, therefore, comes into effect on the UK’s exit from the EU, the fundamental freedoms will continue to apply during the transition period. This period will run at least until the end of 2020.

186 op.cit. pp4-5

63 Stamp duty land tax on residential property

Any couple who own their property jointly and where one spouse works outside the UK who wish to move home and continue to own their home jointly will be subject to the surcharge. They will be unable to obtain a refund unless the spouse returns to the UK. The measure will therefore affect couples who already hold property in the UK, not just those returning to the UK …

The current proposal is that an individual or individuals can make a refund claim if:

• They spend 183 days or more in the UK in the 12 months following the transaction date.

• For a joint purchase, all the purchasers must be individuals and spend 183 days or more in the UK after the transaction date.

A couple acquiring a main residence in the UK which they purchase jointly will both have to return to the UK for 183 days or more in the following twelve months to obtain a refund. Where one party is delayed abroad for work or other reasons, or wishes to continue working abroad, the couple will not be able to obtain a refund of SDLT.187

The ATT also argued that there would be “unintended consequences for trusts where trustees go abroad for a long period”:

Under the current proposals, if one trustee choses to sail around the world for eight of twelve months prior to a property purchase, even if the trust’s UK residency for income tax is unaffected (either because the trustee does not lose their UK residency or the majority of remaining trustees are UK resident), the trust will find itself subject to the surcharge. Again, this is another example where the measure extends beyond the mischief which it is intended to tackle.188

The Institute of Chartered Accountants of England & Wales took the view that, “the surcharge will be an additional source of revenue to the Exchequer at the expense of greater complexity and cost to persons who are not the source of the perceived mischief”:

The policy objective is stated to be to help control house price inflation through a deterrent to property purchase by non-residents. We do not have access to any evidence suggesting that purchases by non UK residents are inflating property prices. Accepting this is so, it is not thought that the surcharge will particularly deter the purchase by foreign residents to any great degree. Rather it is considered that the surcharge will be an additional source of revenue to the Exchequer at the expense of greater complexity and cost to persons who are not the source of the perceived mischief.

It is disappointing to see a further level of complexity to be introduced into an already incoherent and disjointed system. We suggest that government resource would be better directed at developing a unified, cogent and coherent code of property taxes rather than the succession of “bolt-on” measures introduced particularly in the last 7 years.

187 ATT, Stamp Duty Land Tax: non-UK resident surcharge, 2 May 2019 paras 1.4, 4.7-8 188 op.cit. paras 1.4, 3.13

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In terms of impact, the surcharge on a property worth £500,000 a further cost of £5,000 is in practical effect much more likely to be onerous than the £100,000 additional cost on a £10m property. It is far from welcoming if an individual is moving to the UK to live and work but is penalised on arrival for having lived elsewhere. We consider that in general the proposal as set out will impact in areas where it is not intended and will have little effect where the policy objective could be met.

We suggest that the proper identification of the concern here should be the key factor. We suspect that the residence status of the purchaser per se is not the problem but rather the acquisition of large property portfolios or property being acquired for development and onward sale. It seems illogical and discriminatory (even if we leave the EU) to refer only to the residence of the purchaser. It would seem more appropriate to target any measure carefully at e.g. foreign landlords with multiple properties rather than looking merely at the residence of the purchaser …

In any event we are concerned that the surcharge should be as simple as possible. This means using existing tests of residence and having a single applicable regime rather than a raft of new, complex legislation which is difficult to police. Practically, we suggest there should be a de minimis or base threshold of purchase price below which the surcharge will not apply to achieve more effective targeting and to ensure that the tax collection is as efficient as possible for both the Exchequer and tax payers.189

Finally, in their response the Law Society were critical of the Government’s proposals, arguing that “it is not wholly clear to us that the NR Surcharge, which is presumably aimed at discouraging such foreign investment, would promote the government’s home ownership policy objective”:

It is even less clear that all foreign investment to which the NR Surcharge would apply is damaging to home ownership … If changes to the tax system are to be used to address problems of housing supply and affordability, we think they should differentiate between types of transactions based on robust evidence of causal effects. This is so that activities that would otherwise increase the supply and affordability of housing are encouraged, or at least not discouraged through a higher tax burden.

In contrast, the NR Surcharge as currently proposed in the Consultation Document increases the tax burden associated with the purchase of residential property irrespective of whether any transaction to which it is applied might be expected to increase or to decrease supply and affordability.190

189 Institute of Chartered Accountants of England & Wales, SDLT non-UK resident

surcharge: ICAEW representation 49/19, 6 May 2019 p2 190 Law Society, HMRC and HM Treasury stamp duty land tax: non-UK resident

surcharge consultation, May 2019 p3

65 Stamp duty land tax on residential property

2. Previous debate on the impact of SDLT

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.191

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.

191 Corporation tax is also relevant for capital invested in companies, and council tax or

business rates for capital invested in property.

Number 7050, 16 December 2019 66

Notes and source to Table 14 a Years are fiscal years (so 1993 means 1993–94) except for average house prices, which are for calendar years. b 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. c Threshold for residential properties not in disadvantaged areas. d Excludes Scotland pre-2006. 2006 onwards and other columns are UK-wide. e Stamp duty threshold was increased to £175,000 for one year from 3 September 2008 and then extended until 31 December 2009. 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

67 Stamp duty land tax on residential property

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 first-time 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.192

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.”193 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 2012.194 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.”195

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

192 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, 4 July 2017.

193 The Coalition: our programme for government, 20 May 2010 p12 194 HC Deb 24 March 2010 c253 195 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

Number 7050, 16 December 2019 68

start the housing market.”196 However, there was little indication that the Government regarded cutting or reforming stamp duty as a priority.197 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.198

The new 7% rate was debated briefly at the Committee stage of the Finance Bill. Speaking for the Opposition 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.”199 In response the then Economic Secretary, Chloe Smith, said the following:

196 “Buyers are hit hard by ‘punitive’ stamp duty”, Times, 6 August 2013 – see also,

“Unfair tax distorts the home market”, Times, 14 March 2014. 197 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 house-buying in England” (HC Deb 12 March 2014 c226W).

198 HC Deb 21 March 2012 c804 199 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.

69 Stamp duty land tax on residential property

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.200

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.201 The impact of the tax on the property market was discussed when the House debated the provision to set the top rate of duty at 4% in May 2000,202 and the slab/slice issue was examined when the House approved a £5,000 increase in the zero-rate threshold in June 2006.203

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).204 In addition, the Government announced provisions, as Mr Osborne had warned, with retrospective effect, to tackle avoidance schemes that had subsequently come to light.205 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.206 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 in high value UK housing which is left empty or underused while

200 op.cit. cc627-8 201 HC Deb 7 April 2010 cc1099-1105 202 HC Deb 3 May 2000 cc260-266 203 Standing Committee Deb (A) 20 June 2006 cc752-5 204 Guidance on the tax is provided on HMRC’s site. 205 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 206 HC Deb 19 March 2014 c786

Number 7050, 16 December 2019 70

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.207

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.”208 Provision to increase the charge was included in the Finance Act 2015; it was estimated this would raise £95m in 2015/16.209

The impact of the tax was debated at some length in a Westminster Hall debate, instigated by Anne Main, in September 2014.210 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.211

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 revenue, and any policy change in this area would have to be fully funded.212

207 Budget 2014, HC 1104, March 2014 p51 208 HC Deb 3 December 2014 c311 209 Autumn Statement, Cm 8961, December 2014 para 2.125, Table 2.1 – item 5 210 HC Deb 4 September 2014 cc151-174WH 211 op.cit. c155WH 212 op.cit. cc167-8WH

71 Stamp duty land tax on residential property

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. 213

213 op.cit. cc170-3WH

Number 7050, 16 December 2019 72

3. SDLT 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 2018/19 stamp duty land tax (SDLT) receipts (in England and Northern Ireland) were roughly £11.9 billion, £8.4 billion from residential property and £3.6 billion from non-residential property.214 SDLT receipts in England and Northern Ireland are forecast to rise to close to £15 billion in 2023/24, or around £14 billion in today’s prices (adjusted for inflation). 215

The taxation of land transactions has been devolved to Scotland since 1 April 2015 and to Wales since April 2018.

SDLT receipts,216 1974/75 - 2023/24, data for UK until 2014/15, £ billion (real 2018/19 prices), forecasts from 2019/20

3.2 Yield and transactions, by band In 2018/19 the stamp duty yields on residential property were split nearly 39:61 between those paying the tax for purchases under £500,000, and those paying for properties purchased at over £500,000.

Around 2.5% of properties potentially liable for stamp duty were sold for over £1 million – these properties accounted for 32% of the SDLT yield on residential property.217

214 HMRC. Quarterly Stamp Duty Statistics, Table 1, November 2019. Figures exclude Annual Tax

on Enveloped Dwellings 215 OBR. Economic and fiscal outlook – March 2019, supplementary fiscal table 2.6 216 Includes residential and non-residential property transactions and Annual Tax on Enveloped

Dwellings. Sources: HMRC. HMRC Tax Receipts and National Insurance Contributions for the UK, Oct 2019; and, OBR. Public finances databank and Devolved Charts and Tables, Mar

217 Sources: HMRC UK Stamp Tax Statistics 2018/19, October 2019, Table 4a; and, HMRC. Quarterly Stamp Duty Statistics, Table T2, November 2019

0

5

10

15

20

1974/75 1982/83 1990/91 1998/99 2006/07 2014/15 2022/23

Stamp duty anddevolved taxes

Stamp duty

Tax devolved(a) in Scotland(b) in Scotland & Wales

SDLT residential property: estimated yield and liable transactions, by band,

2018/19

0%

20%

40%

60%

80%

100%

Estimated yield Liable propertytransactions

under £250K

£250K - £500K

£500K - £1,000K

£1,000K - £2,000K

£2,000K+

under £250K

£250K - £500K

£500K - £1,000K

BRIEFING PAPER Number 7050, 16 December 2019

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