UK Property Stamp Duty

Cambridge 2000 memos

May 2001

When buying a house in the UK you have to pay "stamp duty" (i.e. tax) to the government at the following rates:

Unbelievably this rate is absolute, not marginal. So, for example, someone buying a house for 250001 pounds pays three times the tax of someone buying a house for 250000 pounds. Even a ten-year old would be able to see that this is completely stupid, and this is something that only the Great (sic) British politicians and civil service would dream up. In short, as implemented this is an unfair tax, and unfair taxes should not exist, they bring the entire tax system into disrepute. Instead of posturing with sound bites all day, Blair and Brown should do something useful with their lives and end such stupidity.

Although the buyer pays the tax in name, in fact the seller is really paying (at least some of) the tax, since the buyer has less money to spend on the purchase because of the tax and so the price has to be reduced accordingly. Well that is in a rational economic world, and the UK property market is not very rational.

Now even if the tax rate was marginal instead of absolute, it is an example of a tax which takes money straight from the wealthier areas of the country (in particular London) and transfers it straight to the poorer areas of the country (e.g. the North of England). You could easily argue that this is a good thing. As it happens the government announced in the March 2001 budget that they are going to take this motive one step further by reducing stamp duty in allegedly deprived areas (no doubt including areas in London where Labour ministers own or want to buy houses). This is the type of tax tinkering which Brown is so enamoured with, but which creates complications in the tax code above and beyond its benefit. Great for Whitehall (more civil servants), not so great for the rest of us.

Another possible good thing with stamp duty is that it should (in theory) dampen down house price inflation. Unfortunately there is a widely held belief in the UK (certainly by the chattering classes who work for the media) that house price inflation is a good thing. But inflation is inflation is inflation, and house price inflation happens to be an example of an inter-generational tax, with money going straight from the young to the old (as a general principle, but not everybody owns a house, and there is some recycling as old people die and leave estates to their offspring).

Stamp duty is at low enough a level that is has not really reduced house price inflation. In the UK you do not pay capital gains tax on the sale of your primary residence. If people did pay capital gains tax on such sales then this really would dampen house price inflation, much more effectively than with stamp duty, but no government is ever going to take this logical step, it would be electoral suicide because people do not generally realise that house price inflation is not a good thing. (If capital gains was ever levied it should be done so on new purchases only and even then gradually, to reduce shocks to the system.)

Cambridge 2000 memos