With a new left-leaning prime minister, the United Kingdom’s government is looking at a radical overhaul of its property tax system. They could do this by announcing a new national property tax to begin reform of the current SDLT and council tax. This proposal comes at a time of robust discussion about the fairness and effectiveness of existing property taxation approaches. It focuses only on properties worth more than £500,000.
Today, the SDLT—which dates back to 1694—is a big part of the story of property transactions in England. Over April, the UK government recently introduced Stamp Duty changes. Today, homes up to £125,000 are exempt from tax! Properties in the price range of £125,001 and £250,000 are charged a 2% tax. If your home is valued between £250,001 and £925,000, you’ll owe 5% in taxes. The rates have been on an ongoing climb up to 12% for the value of a property over £1.5 million. This tax applies to nearly 60% of all property transactions. Since 2014, the average Stamp Duty bill has increased from £6,235 to £9,935.
The Proposal for a New Property Tax
This new national property tax would push the entire cost onto property owners rather than residents. The intent behind this new tax structure is to primarily affect properties in excess of £500,000. It taxes only the portion that exceeds that threshold. For instance, if a current owner has an asset valued at £600,000, they would be taxed only on that extra £100,000.
This we think serves to ease some of the burden financial burden that comes with relocating homes. As thinktanks have reported, people who just purchased their homes and paid a large Stamp Duty will be spared from this new tax. This exemption is intended to alleviate the fiscal responsibilities of new homeowners.
One such proposal would raise the rate to 0.44%. Proponents say this tax rate would raise considerably more revenue than the increase in council tax. An alternate proposal would set it even higher at 0.54%. It extends the 0.278% supplement to any property valued over £1 million, arguing that this method would raise revenue of the same magnitude as Stamp Duty.
“If these reports are true, then taxpayers are facing a wealth tax in all but name.” – The TaxPayers’ Alliance
Criticism of Stamp Duty
For years, economists and critics alike have condemned Stamp Duty. They view it as antiquated and too burdensome, frequently point to it as a major barrier to both homeownership and mobility in the housing market. Paul Johnson, director of the Institute for Fiscal Studies, had little good to say about Stamp Duty’s future. He thinks it might be “the most damaging and pernicious” tax that homeowners now pay.
The increasing average Stamp Duty bill is a symptom of this disturbing trend. As demand pushes housing prices higher, evaluation stress and financial burden on potential buyers grows. The outsized consequences of this tax have spurred many to ask whether this problematic tax is truly necessary in today’s housing market.
Stephen Perkins added his voice to the national conversation around the still-proposed property tax reform. He indicated that while it aims to raise funds efficiently, the potential earnings might fall short compared to current Stamp Duty revenues due to fewer properties being affected.
“Financially, unless the property tax is ridiculously high, this will raise less money than stamp duty, as fewer homes will be affected.” – Stephen Perkins
Implications for Homeowners and the Housing Market
If this new property tax is adopted, that would have very negative implications for homeowners. The shift in taxation from residents to property owners may alter perceptions of property ownership and investment strategies among potential buyers.
Were the new tax to pass, it would dramatically change the incentives in the housing market. It would incentivise sellers onto the market that were previously put off by prohibitive Stamp Duty fees. In easing the financial burden when properties are sold on, the government hopes to encourage more movement in the housing market.
Homebuilders and homeowners alike are watching the House-Senate conference committee deliberations with great interest as this possible tax unfolds. They know how hugely it affects their wallets and the state of our economy. The government’s consideration of reform highlights an essential evaluation of the current system’s efficacy.