Tax incidence!

‘Make property sellers pay stamp duty’

What?

Stamp duty should be paid by the seller of a home rather than the buyer to give a boost to those trying to get on to the property ladder, the Yorkshire Building Society has suggested.

The mortgage lender said that the move would make first-time buyers entirely exempt from the tax burden, saving an average of £3,791 in England and £13,171 in London.

Err, but….

Yorkshire Building Society believes that the reform would increase the number of transactions by 16,000 in the first year, including 6,000 more houses bought by first-time buyers.

This is based on the expectation of a 2 per cent increase in transactions after the overhaul, similar to the effect of the stamp duty holiday in 2009. That was introduced in the wake of the 2008 financial crisis amid the cooling of the property market.

No, who writes the checque changing is not the same as a tax not existing.

Mr McPhillips said there was a risk that those selling would simply increase their asking prices to take account of in the higher stamp duty, but argued that there was “no real incentive” for people to do so. “Yes, you are having to pay the stamp duty on the property you are selling, but it is less than the one you are buying, so in a net change you are better off.”

Facepalm.

47 thoughts on “Tax incidence!”

  1. err, wut?

    Both sides of the transaction price stamp duty into their calculation.

    If this happens, expect to see “Asking price xxx,xxx + stamp duty” or just a higher asking price…

  2. It’s not a terrible idea to align the incidence of the tax with the actual payer. But incentives matter: if I’m moving abroad permanently, I can sell my house, take the money, and “forget” to write a sizeable cheque to the Land Registry.

  3. Stamp duty is a bad tax as it reduces transactions. It is also an unreasonable tax as why should someone who moves house more have to pay more tax than someone who doesn’t.
    (Very few people move for fun).

  4. That was introduced in the wake of the 2008 financial crisis amid the cooling of the property market.

    Yes, indeed: a cooling off was exactly what was needed, but some dickhead decided an overheated housing market was the primary policy of the British government over and above all others, and attempted to sustain the madness by introducing a tax holiday.

  5. OK, so why not abolish stamp duty and simply levy a tax on profits from selling a (first) house? It is free money, untaxed. Why tax salaries, capital gains from shares, etc but leave the biggest windfall most people will receive in their lives untouched?

  6. Rob,
    Sure. I’ll want to offset costs of upkeep and improvement though, and what are we doing about depreciation, inflation and all that?

    It sounds expensive and complicated to me.

  7. “Very few people move for fun.”
    But there’s large numbers of homeowners who regard property as a store of wealth & buy their way up the property ladder leveraging it as they go. Which was what the post 2008 financial policy was about. Protecting those people.
    If you just regard your home as a place to live, it doesn’t matter what the value is. If you wish to change your residence, what you’re buying will have changed in value in line with what your selling. In fact, lower house prices are desirable because you suffer less from stamp duty.

  8. Rob,

    In most cases that would be a significant increase in tax, not a decrease.

    For political expediency, you’d need to add an exemption whereby profits aren’t taxed if you’re using the gains to buy a dearer house. Since that’s the case for most living people, you might as well just scrap the tax entirely.

    It also complicates matters for the banks: how do they calculate how much capital to lend against, when some portion of that capital will be taxed at either 18% or 28%? Same goes for those equity release / lifetime mortgage plans, which I suspect will become increasingly popular in years to come.

  9. bloke in spain,

    > If you just regard your home as a place to live, it doesn’t matter what the value is.

    It matters very much to the bank who has lent you the money to buy it!

  10. “OK, so why not abolish stamp duty and simply levy a tax on profits from selling a (first) house?”

    As has already been hinted at, define “profit”. And then add a whole dimension of politics in and around the calculation of what is in or out of the calculation of profit.

    CGT on second homes is one thing, but doesn’t affect *that* many people. Imagine trying to bring first homes into that kind of régime and the political fallout that would bring.

    Here in CH there’s a whole complicated tax situation around home ownership (theoretical rental value is taxed as income, mortgage interest is deductible, certain maintenance costs are deductible, certain admin charges for apartments are deductible) and it’s a nightmare. But then, homeownership is under 40%, so it affects fewer people.

  11. Rob

    I agree CGT on Primary House Sales is one of the most substantial revenue raisers a government could possibly bring in – but without extending the terms of a Parliament to 30 years to avoid the major electoral fallout there’s simply no way it would go through.

    Additionally while I think money in property is an utter disaster in economic terms – it would be far better in other more useful assets such as equities and bonds, I fully understand given the spate of misselling scandals over the past 30 years why people are reluctant to invest money with Asset Managers or follow the advice of IFAs to invest in the latest fads.

    It’s a very difficult situation, and beyond reducing taxes to around 1914 levels and saying to people who decide to abuse a minimum of 11 years of free schooling by getting no grades or who refuse gainful employment which is good enough for people straight off the plane/boat that they will be forced to the street/soup kitchen I am not sure there is an easy solution and those who peddle one are simply kicking an already battered can down the road for the umpteenth time.

  12. Typical half-baked idea, trying to keep a bubble inflated when it is long overdue to bust.

    “Yes, you are having to pay the stamp duty on the property you are selling, but it is less than the one you are buying, so in a net change you are better off.”

    A lot of people (rightly or wrongly) see their house as a pension, there are probably likely to be a lot of downsizers in future.

  13. VP ” I am not sure there is an easy solution and those who peddle one are simply kicking an already battered can down the road for the umpteenth time.”

    precisely

  14. Actually introducing CGT onto main dwellings would be a good idea, not because it would work, it would be a disaster as the vast majority of people have no concept of tax – they get their wages net of tax, they pay prices inclusive of VAT, they live in a world of ‘I have £x, I can spend it on what I like, if I sell something I own I keep all the money.’ Making people like that have to start interacting with HMRC would result in mass tax evasion/failure to pay for lack of organisation, and force subsequent actions by HMRC to recover taxes owed. Which would be a good thing because more people would then come to hate the State and its taxing powers…………………

  15. I can’t see why there should be a problem introducing CGT on primary house sales provided it started with a tax-free allowance at a level which meant that most people wouldn’t be liable and targeted those making hundreds of thousands or millions tax-free.

    Then simply let the real value of the tax-free allowance erode over time and by the time the majority of transactions were eligible for CGT most people would have forgotten that house sales ever used to be tax-exempt.

  16. Jim,
    Most Americans have to interact with the IRS and its labyrinthine tax code. Yes, they’re more cynical about government than us; but it’s certainly not a recipe for more effective government.

  17. CGT on main dwellings will just stop people from being able to move.
    Get rid of all transaction costs and have a larger council tax would be fairer (particularly on those who don’t have a decent house but with lower prices could afford one).

  18. Ed

    As the seemingly disappeared ‘bot’ DBCReed will tell you, the LVT will do much more than that – it is believed to cure cancer, offer the solution to the Arab-Israeli conflict and the troubles in Syria, as well as the key to life the universe and everything.

    At least that’s what that good natured, irreverent commentator from Tax Research UK, Carol Wilcox says….

  19. Tis the main reason I will not move again.

    No more money to grasping bastards like Estate Agents and everyone else who has a claim on a deal between two people.

    The whole scam of buying and selling houses is such a success because of the vain desire for a bigger property.

    Fuck the games room or the study or the “orangery” or the coverted loft….I will be dead in 25 years time.

  20. CGT on first homes would IMHO kill the property market stone dead.

    As I see it operating.. You buy a house for 200K. Live in it for some years, after which it’s “worth” 400K – as are all the other places that were 200K some years ago. Sell for 400K, pay (say) 20% on the “profit” leaving you with 360K to spend on the next place – so, without injecting more capital into the deal you can only trade down…Rinse and repeat…

    So who’s going to do that? Without a substantial threshold price, property would approach zero given enough time. 🙂

  21. @ AndrewM
    “> If you just regard your home as a place to live, it doesn’t matter what the value is.

    It matters very much to the bank who has lent you the money to buy it!”

    Which shows the insanity of banks being in the house purchase finance business. Banks are supposed to be providing a low risk home for their depositors money. Property is a single class of asset. It is not “as safe as houses”. Large exposure to a single class of asset is high risk. So where does the risk go. As we found in 2008, to the taxpayer. if the taxpayer doesn’t cover the risk the entire banking system goes down.
    Personally, I don’t think the banks should be in the business of long term financing anything. That’s the role of equity. So the risk stays where it should. With the investor. If that means dearer money, so be it. If an enterprise4 can’t produce a rate of return commensurate with the risk of investing in it, it’s not worth having.

  22. @Pogo
    “So who’s going to do that? Without a substantial threshold price, property would approach zero given enough time”

    No it won’t. You’re ignoring that houses have a utility value – the value of not sleeping in the rain – as well as an investment value. Like saying a new car is only worth its scrap value because all new cars end up as old clunkers.

  23. Do other countries have CGT or the equivalent on first houses? I don’t know. I know France has exorbitant estate agency fees and stamp duty (equivalent) on top of them, which makes you grind your teeth a bit but then you realise this is probably what has stopped the housing market here going bananas. True, Paris is expensive as are some other spots, but you don’t have some spiv in a flammable suit telling you a crumbling, 2-bed semi is “worth” £400k because the metro “might” be extended here in future or it’s “only” 3 hours from London.

  24. Is it just me?
    So, we aren’t building enough houses, so prices are rocketing, so home owners are making unearned money. OK.
    “So let’s apply CGT”.
    Er, doesn’t the better solution jump out from the words “we aren’t building enough houses”.

  25. Alex11,

    That’s a very good solution, but to a different problem. Your problem is not enough houses / high prices / unearned money. My problem is that moving house is too expensive. Solving one won’t solve the other.

    There’s absolutely no good reason to have a transaction tax on housing. It clearly hasn’t curbed speculation (take that, Tobin taxers); but it is discouraging people from moving house, especially at the higher end of the market.

    While we’re proposing strange new ideas, how about VAT on house purchases? First-time buyer pays full whack, upsizer only pays the difference, downsizer gets a rebate. That aligns nicely with voting patterns by funneling cash to retirees.

  26. @andrew M,

    You’d have to do marginal VAT, i.e. the purchaser pays VAT based on the increase in value of the house that they are purchasing. Which is basically just CGT by another means…

  27. The CGT problem would be less if CGT used index-linked tax bases so you only paid tax on the increase in value, rather than nominal price, of the asset. This would decrease the flight to property as the “only safe store of value” and hence the faster-than-inflation rise in house prices and make a CGT charge less unfair.
    But Alex 11 has his finger on it.

  28. Alex11 – and the problem is not being allowed to build enough houses. Solve that and the problem then becomes not enough bricks, not enough skilled workers…
    But still won’t sort out the issue of a tax on house purchase.

  29. Going back to the Yorkshire BS’s original comment about changing stamp duty, there is arguably a problem with the current system, but only because of imperfect mortgage markets.

    At the moment you can borrow 90% (say) of the purchase price of the house, so that leaves the buyer having to come up with cash for a 10% “deposit” and the whole of the stamp duty.

    If stamp duty were shifted from the buyer to the seller, and assuming the incidence is and remains with the seller so the price increases by the amount of the stamp duty to cover it, then (if everything else stays the same) the buyer will be able to borrow 90% of the purchase price, which now effectively includes the stamp duty. So the buyer will only have to come up with cash for 10% of the stamp duty rather than 100% of it.

    Of course one might think that a building society, in the business of providing mortgages to house buyers, might be able to come up with an easier solution to this problem, but never mind.

  30. dearieme/ Henry Crun

    I believe Corbynite/ Murphyite policy is to CPO all private property in the Uk and have the courageous state allocate it on the basis of perceived need.

  31. In the USA there is no CGT on the sale of a primary residence if the money is used to buy another house within a year. (Dennis the Peasant can provide the details.)

  32. @Richard

    That is a good point, for a lot of would-be homebuyers it seems to be getting the deposit together which is the bulk of the problem. (The typical argument is that “once I had the home, I’d be able to afford it since I would no longer be paying rent” – though I’m personally generally skeptical, as if you are struggling to save now, how would you cope with mortgage repayments if the rates went up? Regardless of that, there’s logic in what you say.)

  33. Another approach to making CGT on principal private residences workable would be to roll it into a capital tax regime which worked on a lifetime allowance rather than an annual one. Lifetime events such as accessions from inheritance, drawdowns from gross funds, sale of sole trader businesses, and capital gains on PPRs could all accumulate against a lifetime allowance allocated at birth and indexed to GNP. Only once you have exhausted your life time limit do you start to pay at a flat rate.

  34. Abolish SDLT ( and CGT which is easily avoided anyway ). It’s a drag on labour market flexibility, and part of the reason renting is soaring, and ownership declining.
    The government would have to cut some spending ( WFA, and the triple lock perhaps ) and raise other taxes like raising VAT on energy and food to the correct level.
    There’s a subject of study which has it that taxing consumption, income and externalities are good policies, but taxing transactions and investment are bad policies, but the name escapes me.

  35. CGT is a right mess. It used to be (ignoring various reliefs) taxed at the same rates as income but taking indexation into account. Fair enough, I suppose. Then Alistair Darling (I think) worked out that the average rate of CGT on all transactions was 18% or so once reliefs were taken into account so he scrapped indexation and lowered the rate to 18%. Some sort of logic I suppose. Then they introduced the 28% rate (but still ignored indexation).

    The Murphatollah (being a mean fat twat) unsurprisingly wants the worst of both systems. No indexation and rates at income levels. Basically a tax on inflation.

    My problem with CGT on primary residence is that it strays from the idea that you tax things when the reason for entering into the transaction is to make a profit. Besides, what position would it put someone in who had lived in the same house for ages and so was sat on a large profit and then had to move house because of (say) a job in a different part of the country? After tax, he or she would be forced to downsize….

  36. After tax, he or she would be forced to downsize….

    You say “bug”, they say “feature”.

    Actually they probably say “the stinking neo-liberal bastard is lucky we didn’t string him up, buying a house, the baby-killing, non-Corbyn voting exploiter. Houses should be bought by one’s trust fund.”

  37. I am mildly surprised that no-one has pointed out that if the stamp duty was paid by the seller, the amount paid would be higher which is unlikely to make buying and selling houses any easier.
    Instead of duty being x% of (price exc. Stamp Duty – threshold) it becomes x% of (price inc Stamp Duty – threshold).

  38. @John77

    Gordon Brown froze indexation as from April 1998. He did introduce taper relief to sort-of replace it. Alistair Darling abolished indexation and taper relief as from April 2008.

    For individuals. of course. For companies, indexation still exists.

  39. “Make property sellers pay stamp duty”

    Property sellers already pay stamp duty. The incidence is entirely on the seller.

  40. @Andrew C
    “Abolish SDLT ( and CGT which is easily avoided anyway ). It’s a drag on labour market flexibility, and part of the reason renting is soaring, and ownership declining.”

    Good point, make pro single parents share homes to pay for it and make working a better choice

  41. It’s also a bit tricky given that the rate of stamp duty depends on who the buyer is- e.g their are higher rates if the buyer is a company or if the property is to be used as a second home. Not something that a seller can control in any meaningful way.

  42. There are high transaction costs on both sides already, the buyer bears the liability for the SDLT but the seller probably has a big bill for Estate Agency. I have just moved, the Agent pocketed twice as much as the government (even allowing for the VAT on the agents fee).

    In practice I don’t think you can define precisely where the tax incidence will fall. SDLT is just one factor in a complex budget on both sides. If there are different rates on the same transaction depending on whether it is a second home etc then that effectively changes the sort of buyer who will buy at a given price.

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