Tax incidence, tax incidence

Ministers will be urged to reform stamp duty to make it a seller’s tax rather than a buyer’s tax to kick-start the housing market and give a boost to first time buyers.

John Stevenson, a Tory MP, will make the case for reform in a Westminster Hall debate, to which the Government will have to respond.

It would help hundreds of thousands of first time buyers who pay an average of £3,500 stamp duty on their first property or around £10,000 in London where properties are more expensive.

Entirely possible that there are cash flow issues here but who bears the burden, rather than who writes the cheque, won’t change at all.

27 comments on “Tax incidence, tax incidence

  1. True, but stamp duty does add to the overall cost of owning a home as everytime you move sideways (or don’t because it is too expensive) you have to pay a lot.
    I would imagine it has affected the number of transactions a lot, bad news for solicitors, removal men etc.

  2. Won’t it actually (marginally) make things worse?
    The sellers increases the price of the property by £2500 from £249,999 to 252499, but that pushes it over into the next rate brackets so the price should be pushed up even more.

  3. But it’s possible that reducing the cashflow issues will reduce the deadweight costs of the tax.

    At the moment to buy a £300,000 you have to find cash for £15,000 stamp duty and typically £15,000 towards the purchase price to meet the mortgage lender’s conditions, borrowing the other £285,000. So £30,000 cash needed.

    Assuming the incidence is and remains on the buyer, so the price increases to £315,790 (depends how they do it, but that lets the seller pay 5% and still end up with £300,000), the buyer now only has to find £15,790 up-front (i.e. the 5% towards the purchase price to satisfy the mortgage lender; no up-front stamp duty) rather than £30,000, and borrows £300,000.

    Incidence hasn’t changed,but the disincentives have reduced, because it’s 5% paid over 25 years rather than 5% up front, and therefore the harm done by the tax will be reduced (although not eliminated). Cashflow does matter.

    However that depends on whether the mortgage requirements change; if the lenders drop equivalent mortgages from 95% to 90%, then we’ll be back where we are.

  4. Stamp Duty is a pretty shit tax all round.

    It started as little more than an admin fee to cover the cost of officially recongising a transaction. It’s morphed into a tax raising measure, as these things always do.

    FFS. Thousands of pounds for a red embossed stamp on a share exchange document. The same amount of work for the stamp office whether it was a £10,000 deal or a £10,000,000 deal. If that isn’t ‘rent seeking’ I don’t know what is.

  5. Is the incidence of SDLT actually on the buyer?

    My understanding is that house prices are determined by what mortgage companies will lend, with the upper levels being determined by how much cash corrupt Russians/Chinese have available.

  6. Is the incidence of SDLT actually on the buyer?

    My understanding is that house prices are determined by what mortgage companies will lend

    Mortgage costs (immediate and repayment) are incident upon the buyer.

  7. Andrew C said:
    “Stamp Duty … started as little more than an admin fee to cover the cost of officially recongising a transaction.”

    Nope. Right from the beginning it was a way of gouging more tax money.

    The original statute, in 1694, was “An act for granting to their Majesties several duties upon vellum, parchment and paper, for four years, towards carrying on the war against France.”

    It was a nasty foreign idea brought over by the Dutch Usurper.

  8. Andrew M,

    As the stamp duty will be added to the selling price, this proposal will have the effect of spreading it over the life of the mortgage (except for the bit which will be added to the deposit).

  9. To solve the moving-sideways problem, stamp duty could be reformed to apply to the price difference between sold and bought properties. Ooops, then first-time buyings will be gouged. And negative stamp duty if you’re downsizing. Ooo! I know! Capital Gains if you downsize, Stamp Duty if you upsize! MOAR!

  10. It would help hundreds of thousands of first time buyers…

    Rilly? I thought that the government had just abolished Stamp Duty for first time buyers…

    DK

  11. A modest proposal: spread the charge over twenty-five years, as an annual (or even monthly) charge.

    I would have thought sellers would be very happy with that, assuming a rising market, as the amount of stamp duty which borrowers had factored into their mortgage application would now instead go to the seller in a higher house price. The borrower will then be paying £20 a week to the government on top.

    I’m no expert on the housing market mind. My assumption is that people borrow the absolute maximum they can afford then lose their minds and buy a small box somewhere.

  12. @RichardT
    “The original statute, in 1694, was “An act for granting to their Majesties several duties upon vellum, parchment and paper, for four years, towards carrying on the war against France.””
    I think as that finished about 300 years ago so should stamp duty.

  13. @anon
    I’d be happy though if the proceeds were used for their original purpose. It’s never the wrong time to have a war against France!

  14. Ian Reid beat me to it. Either abolish stamp duty (as anon suggests), or use it to fight the French.

    Perhaps we should use it to fund Brexit (as the closest thing to fighting the French we’re likely to get), then abolish it?

  15. I’m not sure the affects are that simple to predict and I admit I haven’t quite got my head round this.

    We know that at the moment house prices tend to cluster just below each threshold so we need to consider what will happen at those thresholds.

    So now we switch who’s handing over the cheque. The seller now has to hand over a cheque and thinks they’re out of pocket and decides to put the price up to get back to his original asking price. However the price now moves in to the next threshold and there’s a step increase in the price, as the buyer sees it.

    This may push the price beyond the intended market and force the seller to drop the price back to what it was originally, just below the threshold because of perceptions of the buyer. If this happens it is likely a number of sellers will unwilling to drop their price and take their property off the market – pushing up prices.

    On t’other hand, the seller may think that as he’s gone over the threshold he may as well go for an even bigger increase and see what happens. This forces all house prices to rise, shutting out those at the bottom as everyone else has to settle for a lower quality property than they thought they would get.

    Thank goodness for those omniscient MPs and their advisers and many others who know how an economy really works and can predict what these changes will do at the micro level.

  16. AndrewM

    “A modest proposal: spread the charge over twenty-five years, as an annual (or even monthly) charge.”

    SDLT seems to raise 7-8b quid or so per year, on about 1.2m transactions (out of ~23m dwellings). that’s 5% of dwellings changing hands each year, which suggests to me that the price per dwelling includes a (possibly substantial) liquidity premium.

    Council Tax appears to raise around 27b quid per year, or a bit over 3x as much.

    Scrap SDLT as a separate charge, and whack it onto Council Tax, to maintain the total revenue at ~35b. The average CT charge will rise by (or top out at) about 30%, from an average (in England) of £1,100 to a tad over fourteen hundred.

    Sellers no longer have to write that cheque. Buyers will directly see the charge, annually, and monthly (on the CT DD out of their bank account). Even if the amount simply shifts from the mortgage repayment to CT, it’ll be more visible.

    The payment goes to the local council, not to Whitehall.

    I don’t know what’s likely to happen next; I think that prices will fall by the per annum rise in CT (spread over the life of the mortgage, but more likely over the anticipated tenure – possibly about half or even a third of the 25 year term). If liquidity improves, then the rate of growth in house prices will slow, and prices may fall if that liquidity premium narrows or vanishes. If liquidity improves substantially, then there may be
    knock on effects elsewhere.

  17. Scrap SDLT as a separate charge, and whack it onto Council Tax

    Thanks, renters will be delighted to take on that extra burden.

  18. Ducky is onto something – abolish SDLT, increase CT by half the nominal tax not collected, and make the landlord liable to pay council tax in all cases ( as in Northern Ireland ).
    Massive drop in administration costs of collection, and the landlord can stick it on their tax return as a pre-tax allowable expense, unlike when renters write the cheque when it comes out of post-tax income.
    An excellent and productive way of transferring income to local government from the big bad centralists.
    LHA will have to rise a little to compensate.

  19. Rob;

    I expect they’ll be ecstatic. If I were to go the whole hog, I’d put renters onto FRI contracts as well.

    This is a bit of a game, but note that SDLT doesn’t arise until the property is sold. Anyone wishing to avoid crystallising that liability, simply doesn’t play in the game. So there should be liquidity effects.

    Anyway, theoretically, at least, rental rates will fall to offset the rise in CT, probably over time. Landlords will probably be able to capture excess profits, but only until the next renewal. A possible market response here, is that landlords begin to offer new contracts, ahead of the implementation, with a longer term, in an attempt to lock in the excess. Renters will want to move to shorter terms, expiring at or very soon after implementation, and then renegotiate afterwards, to get a lower rent to offset the CT rise. I’d expect the situation will resolve very swiftly indeed, save that the likely winners will be lawyers and removal firms, so go long Pickfords.

  20. Bongo, you are encouraging me.

    Schoolboy error.

    You seem to be suggesting that the landlord be able to offset the SDLT component of the higher CT liability, against Corporation Tax. I’d be very wary of this.

    SDLT is liable on the transfer of ownership, regardless of whether the property is occupied or vacant. As a result, the SDLT component would also be due whether vacant or occupied. Thus, an effective floor to CT. Once a property becomes vacant, this becomes the landlords problem – it should act as an incentive to get a tenant in – but it is possible to view it as charge to ownership, so the temptation would be to attribute the charge across the owner, plus whoever has a lien against the property, so it would clearly include mortgage lenders (“Stick it to the Banksters, man!”), and it gets worse if there are second liens or more.

    It buggers up the apparent benefit of transparency of the incidence.

    A couple of other thoughts; changing SDLT in this way seems to be a potential way to begin to solve the “can’t get there from here” problem for LVT advocates. You could also make NI payable, by the employee, to the LA, creating something approximating a local income tax.

    Whatever. My assumption here is that the payment is made to the LA, and that the LA is (eventually) free to set the rate. How you stop the national level government claiming that power, overtly or covertly, could be a bit of an issue.

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