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Sunday, 7 May 2017

ABOLISH STAMP DUTY and replace it with LVT

What is politically possible? Change the most hated taxes first:

Where is the best place to start on the long journey to implementing LVT?

Demanding total implementation of LVT straight away is totally unrealistic. No politician is going to back it. Instead, let’s be a bit crafty and look for an easy win — replace an unpopular tax on housing with a little bit of LVT.

There are many taxes on housing — Council Tax, Inheritance Tax, Capital Gains Tax, care home costs or Stamp Duty. Which tax is hated the most? 

This is what the great British public think about the fairness or unfairness of a selection of taxes[1].

Why not start with Inheritance Tax? 

I will, later on, but for now I’ll stick with Stamp Duty Land Tax[2] (SDLT) as the best and easiest tax to abolish and switch to LVT. As a bonus it even has ‘Land Tax’ in its name! It may be rated as the second most unfair tax, but it’s the best place to start the switch.

The politics of SDLT: SDLT is a nasty tax which hits house-buyers at a very vulnerable stage in their lives. But Chancellors of the Exchequer like it and have raised the rate of SDLT repeatedly. They get away with this tax hike. Unlike Thatcher’s Poll Tax in the 1990s, there have been no mass protests in the streets against SDLT.
What makes SDLT a not-so-bad tax-option? In a way it is a ‘voluntary’ tax — you only pay if you buy a house. It certainly has the aura of tradition about it. Once upon a time an actual postage stamp  had to be stuck on documents such as receipts to make them legal.
SDLT also seems ‘fair’ because it attaches to a sum of money which is changing hands. The fact that it is the buyer, not the seller who has to pay the SDLT means that it is an extra cost on top of the purchase price. (Government documents make it clear that the buyer must pay. This tax differs from say Income Tax where the recipient of the money must hand over a portion to the state.)

The Chancellor gets away with it because not that many voters are hit by SDLT. Only one or two million houses are bought each year. So only about two or three million people get hit by SDLT. Three million out of an electorate of 46.5 million (2016) is a small percentage. People have short memories and quickly forget an onerous one-off tax burden if it happened a year or so ago.

Implementing the new mini-LVT: Stamp Duty is a ‘voluntary’ tax. If you don’t want to pay it, then don’t buy a house or flat. The same applies to my proposed LVT replacement.

The new LVT would be a clean break with the old Stamp Duty. No need for parallel trialling. 

I would like to draw on an idea proposed by Tony Vickers[1] for administering LVT and also making it more politically acceptable.                                                                                                               

Since SDLT is a national tax[2]use the National Income Tax systemPayment of LVT could be organised through the national PAYE system. 

At the time of purchase, when the land value will be established, the new owner has to register the sale with Land Registry. They in turn can notify HMRC of the tax liability. (Obviously in the rare occasions where the purchaser is not already a registered UK income-tax payer, other arrangements will be necessary).                                                                              

Payment of LVT can then be established through the usual income tax arrangements: LVT might mean no more than an adjustment in allowance arrangements. If there is more than one owner for example, joint ownership by couples, then the liability to pay LVT can be split between them as they wish.

[1] In his 2015 ALTER paper Real Hope for Homeownership
[2] following various devolution settlements, this really only applies to ENGLAND.

The dire economic effects of SDLT:    House-buyers, having scraped and saved to get the money for a deposit, now have to find another large sum of money. Buying a house is a trigger for the purchase of lots of consumer durables, spending which stimulates the economy. But fond dreams of carpets, curtains and dishwashers may have to be put on hold to pay the SDLT.
It is economically illiterate, too. Its lumpiness acts as a drag on the housing market, discouraging some sellers from putting their house on the market, putting off some buyers, too.
Labour Market Economists have also spotted the negative effect of SDLT. In their ideal world workers would face few impediments to moving to where the jobs are. If this involves selling your house and buying another, then this tax acts as a drag on free movement of labour. Since SDLT is imposed every time a house is bought, this is especially onerous on those heroes of the flexible labour market, the frequent job-changers and movers.
Maybe the effect of extra-high SDLT which Chancellor Osborne in 2015 helped to cool down an over-heated market. The budget after the 2015 elections which brought in this quasi-mansion tax was soon followed by squeals about “Prices in Kensington collapsing”[3] .
This may be true in one small corner of the market, and shows that tax incentives can work. In the wider market throughout the UK the seemingly unlimited flow of cheap-finance continued to fuel the house price boom continued. House prices rose by 9% in the year to November 2015 according to the Halifax.
So SDLT is both unpopular and a tax which gives the wrong market incentives. It is ripe for reform or replacement, but abolishing altogether would mean losing a very traditional, long-accepted tax. 

We can offer a way to change SDLT for the better -- to a small LVT

[1] based on a YouGov Opinion Poll
[2] SDLT as described here may only apply to England. Wales will levy its own ‘Land Transactions Tax’ w.e.f. April 2018, the first ever devolved tax-raising power for the Welsh Assembly.

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