CML Publishes Ideas for Stamp Duty Reform
The market distortions caused by the existing stamp duty system could be resolved simply and effectively without necessarily reducing the total amount of money raised for the Government, according to new research commissioned by the Council of Mortgage Lenders.
The CML is strongly opposed to any increase in rates of stamp duty, as the duty is already a significant burden and effectively acts as a tax on mobility. However, it has been making an increasingly significant contribution to Government finances in recent years. Duty levied in 2001/2 totalled £2.76 billion, compared to £830 million just four years earlier.
The CML research recognises that the Government is unlikely to be willing to forego this source of revenue. However, it is possible to improve the system significantly without necessarily reducing the tax yield.
One of the main problems with stamp duty is the "slab" system on which it is levied. So, for example, a property worth £249,000 gives rise to 1% stamp duty of £2,490, but a property sold for £251,000 sees a huge rise in the stamp duty bill to £7,530. This is because the 3% rate that applies to properties over the £250,000 threshold is levied on the total price - not just on the portion exceeding the threshold. A similar distortion occurs at the £500,000 level, beyond which 4% duty is levied.
The solution is potentially straightforward. Instead of levying duty on a "slab" basis, it should be based on a graduated structure, where only the portion exceeding the relevant threshold is liable for stamp duty. The CML's research sets out several options for how this could be done. One simple option would be to raise the threshold for stamp duty exemption to £115,000, and levy 5% duty on the portion of the property's value exceeding £115,000 (approximately where stamp duty would cut in if the £60,000 threshold last amended in 1993 had been index-linked). This would continue to raise revenue at a level similar to the existing amount. It would also remove greater numbers of first-time buyers from paying stamp duty, which would be beneficial as these are the people for whom it causes the greatest burden.
Michael Coogan, CML Director General, commented:
"We urge the Treasury to reform the current system of stamp duty. As our research shows, it would be quite possible to eliminate the worst market effects of the current system while still maintaining similar levels of revenue for the Government. Although we are not specifically proposing which variation should be used, we see a move to some form of graduated structure of stamp duty as the best way forward.
"Reforming stamp duty to a graduated structure would be more efficient, and would significantly reduce the existing pricing distortions. It would help more households to move, and could potentially help first-time buyers. Just as importantly, a graduated system seems inherently fairer than the current system which sees massive differences in the level of duty payable as a result of seemingly arbitrary thresholds."
For further information please visit www.cml.org.uk