SDLT and first-time buyers

"If the Labour Party is serious about tackling falling rates of homeownership, then it needs to adopt a radical approach to property taxes. "

Buying a home in the UK can be a long, daunting and expensive process for anyone, but none more so than for first time buyers. Not only do they have to contend with prohibitively expensive homes, an arcane conveyancing procedure (the process of transferring property) but also a substantial tax bill.

 When you buy a home in the UK, you have to pay stamp duty land tax (SDLT). SDLT taxes the buyer as a percentage of the consideration for the property (how much you pay), at progressively higher rates. The table below shows the rates at which you pay SDLT.

 

Tax Band

Taxable Amount

SDLT Rate

£0-£125,000

£125,000

0

£125,001 - £250,000

£125,000

2%

£250,001 - £925,000

£675,000

5%

£925,001 - £1.5m

£575,000

10%

£1.5m +

Everything above £1.5m

12%

 

Therefore, if you buy a home for £300,000, you would pay no tax on the first £125,000, then 2% on the next £125,000 (£2,500), and a further 5% on the remaining £50,000, (£2,500). You would pay a total of £5,000 in tax. Most mortgage providers in today’s market require at least a 10% deposit, so in this scenario you would need at least £30,000, plus £5,000 in tax and probably around £2,000 in conveyancing fees, totalling around £37,000.

 SDLT makes buying a home even harder, as it greatly increases your up-front costs, in the above example by around 17%. It makes no sense for people buying their principle residence to pay a tax for doing so, and even less sense when you compare SDLT to the capital gains tax regime (CGT), i.e. the tax you pay on any money you make when you sell capital assets, e.g. property. When you sell the home you live in you pay no CGT. This puts us in a situation where the people who are making money pay no tax, and those who are not, do pay tax. SDLT is in effect a consumption tax.

 Consumption taxes usually act to discourage the consumption of a good, which puts us in a perverse situation where we are on the one hand encouraging people to get onto the housing ladder and at the same time making it more difficult and unaffordable to do so. It is the policy of every major party to increase home ownership, especially amongst the young. The current government has implemented a number of schemes to help people get on the housing ladder, such as the Help to Buy: ISA, which like any ISA effectively shields any money made in it from tax. That scheme has its own deficiencies, but if you were to save the maximum amount of £12,000, the government will top it up by £3,000. So if you apply that to our scenario, the real benefit of the Help to Buy: ISA is that the rate of SDLT is reduced to £2,000, and your home is in essence no more affordable. This seems to be a case of the right hand not knowing what the left hand is doing.

 

Of course the Help to Buy: ISA only applies for properties up to £250,000, and £450,000, in London. So, whilst the Help to Buy: ISA would be more advantageous outside London, in London where the problems for first time buyers are most acute, it is next to useless when SDLT is accounted for.

 The last Labour government introduced an SDLT exemption for first time buyers on properties below £250,000, however this was scrapped by the coalition government. If the Labour Party is serious about tackling falling rates of homeownership, then it needs to adopt a radical approach to property taxes. Reintroducing the SDLT exemption and extending it would immediately make the prospect of owning a home more attainable for thousands of would be first time buyers.

Bren Albiston is a Young Fabian member. You can follow him on Twitter at @BAlbiston

 

The Young Fabians provide policy analysis for the left. If you are interested in campaiging for the Labour Party, and raising these issues on the doorstep, please volunteer at http://www.labour.org.uk/volunteering

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