Britain’s most-hated tax is about to be overhauled – but only if you live in Scotland.
2:55PM BST 12 Jul 2013
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Britain's most-hated tax is about to be overhauled – although only if you live in Scotland.
However, there are hopes that the replacement of stamp duty north of the border, which will see the end of the hugely unpopular system of "highest rate of tax on the whole amount", will be copied in the rest of the country.
"There's a referendum on independence coming up," said Ray Boulger, an expert on the housing market. "It will be an open goal for Alex Salmond if he can say to Scottish voters: look, we abolished this immensely unfair tax as soon as we had the power to do so but the Westminster government is happy to keep it." To neutralise this threat, the Coalition could announce its own changes to stamp duty before the general election, Mr Boulger added.
Stamp duty is hated for two reasons. First, the amounts involved can be huge, preventing some families from moving when they need a bigger home and making it harder for people to move when they are offered a job in another part of the country.
Second is the unique way in which it is levied. Unlike income tax, say, where higher-rate taxpayers pay 40pc only on that slice of earnings above the threshold, stamp duty is charged at the higher rate on the entire sum if it is above one of the thresholds.
This gives rise to huge jumps in the tax bill at the various thresholds – £125,000, the level at which 1pc stamp duty becomes payable; £250,000, where the rate rises to 3pc; £500,000, above which 4pc is charged; £1m, where the rate is 5pc; and £2m, at which the rate becomes 7pc.
For example, if you buy a home for £249,999, just below the £250,001 level at which stamp duty rises from 1pc to 3pc, your tax bill comes to £2,500. But pay £250,001 and the cost shoots up to £7,500 – an increase of £5,000.
A bill passed by the Scottish Parliament last month scraps this system, replacing it with one that works like income tax. This will get rid of the sudden jumps in tax bills at each threshold. The new law is due to take effect in April 2015.
How likely is it that the Westminster government will follow Holyrood's lead?
Jeremy Leaf, a north London estate agent and housing spokesman for the Royal Institution of Chartered Surveyors, said the change in Scotland was "very good news" for the prospect of a similar move in the rest of Britain. "There's nothing better than showing a new system works in a place so close to home – it's like having a pilot scheme on your doorstep," he said.
Keith Denholm of Allied Surveyors Scotland said the reform to stamp duty north of the border was "long overdue" and would be relatively easy to introduce in the rest of the UK.
Mr Boulger, who works for John Charcol, the mortgage broker, said Scotland's move "must make a similar change elsewhere in Britain significantly more likely". He added that a decision was possible before the general election in 2015.
"There's a good chance that the Government will announce a review in this year's autumn statement or next year's Budget," he said. "This would allow it to announce the scrapping of the existing system before the election."
He pointed out that the Chancellor had reduced the top rate of income tax from 50p to 45p because he believed that higher tax rates discouraged economic activity. "If he really believes that, how can he argue against a reform of the stamp duty system that is bound to allow more people to move house, boosting activity in all sorts of areas, from DIY retailers to removal companies?" Mr Boulger said.
The effect of stamp duty on the housing market has become more acute since the financial crisis. When first-time buyers could get 100pc mortgages, saving up the stamp duty didn't take too long. Now, however, deposits of at least 10pc are required, with the stamp duty on top. Falls in house prices since the pre-crisis peak have also wiped out the equity in many people's homes, so their savings are needed for a deposit when they move to another property and cannot be used to pay stamp duty.
Paul Gallagher, a tax partner at Ernst & Young Scotland, which wrote a report on the new regime, said the Scottish Government had spent a lot of time and effort looking at land taxes around the world in order to come up with the best system. "We would expect the Treasury and HMRC to be looking at it," he said.
A spokesman for the Treasury said it had "no plans" to change the stamp duty regime in the rest of the country.
Can you avoid the dreaded duty?
The perceived unfairness of the current stamp duty system, especially the sudden jumps in tax bills at the thresholds, has led some people to look for ways to avoid it. Here are some of the tricks used either now or in the past.
Selling fixtures separately
Anything that brings the purchase price of a home below a stamp duty threshold will have a big effect on the tax bill. So some buyers persuade sellers to charge for fixtures such as curtains, carpets and kitchen appliances separately in order to bring the price of the property itself below a stamp duty threshold. This is perfectly legal as long as the fixtures are priced reasonably, but sometimes inflated prices have been agreed to squeeze the house price into a low tax band.
Cash under the table
Even simpler is agreeing an artificially low price for the official transaction and topping it up to the real price with an undeclared payment to the seller. This is outright tax evasion and therefore illegal.
Using a company
You used to be able to avoid stamp duty by putting your home into a company, then selling all the shares in the company to the new owner, rather than the property itself. This was often used for high-value homes. However, the Treasury has now clamped down on the practice.
Selling two or more leases
You can divide a property into separate legal entities so that each is priced below a stamp duty threshold. For example, a house could be split into two leaseholds and a freehold, with the new owner simply buying all three.
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