Stamp Duty (Housing Market)

John Redwood Excerpts

Thursday 4th September 2014 Westminster Hall

[Mr Jones]

That can also happen.

We need to look at the slab rate again and to consider the distorting effect that it has on the market and the difficulties that it causes people, whether buying or selling—for people who want to sell because they want to downsize, or people who want to sell because they want to move on. That is one of the reasons why some of the suggestions that I have heard over the years to charge stamp duty to the seller would also be completely inappropriate and unacceptable; it would place a massive burden on those trying to sell the investment that they have often worked for over many years.

I make a final plea to Ministers. If they are ever minded to make any changes to how stamp duty is charged or to its rates, will they be extremely careful about how they do it? Back in the dark days of the great Labour recession in 2008, following pressure from the Conservative party, the then Prime Minister and Chancellor decided to create a stamp duty holiday. They announced it with great fanfare in the press and on the media, but it was probably six or seven weeks before the policy was implemented.

I can tell hon. Members that a flat property market was depressed further, because people did not want to conduct transactions between when that announcement was made and when the measure came in, because that would not make financial sense and they could save money. I implore Ministers to make any changes carefully and to consider the implications for the overall housing market, which is extremely important to our economy. The housing market is now on the move, which is part of the reason why our services sector in this country is doing so well.

I ask Ministers to consider the issue extremely carefully. It affects not only the south-east or London, but all parts of the country in differing ways. It creates massive distortion, because of the slab rate. I ask the Minister to consider it carefully not only in reply to the debate, but in his work on our party manifesto.

[Mr John Redwood (Wokingham) (Con)]

rose—

[Mr Clive Betts (in the Chair)]

Order. I say to the right hon. Member for Wokingham (Mr Redwood) that it is slightly unconventional to come into the Chamber halfway through the debate; as he is aware, other people have spoken and a debate is normally about exchanging views and listening to other people. On this occasion, however, we have plenty of time and I will still call him.

[Mr John Redwood (Wokingham) (Con)]

I am grateful, Mr Betts, and I give my apologies to you and to the Chamber, but my constituents also wanted me to make it clear that Wokingham supported the puppies motion in the main Chamber. I felt that I had to do that first, before coming to debate the important issue of stamp duty. I pay tribute to my hon. Friend the Member for St Albans (Mrs Main), who proposed it as a subject for debate. I supported her, so it would have been wrong not to attend and pledge my support.

I have three main reasons to advance for why the Government should do something to reduce the imposition of individual stamp duty on property transactions. First, the existing stamp duty regime has an adverse impact on home ownership, which the Government should wish to promote. Secondly, the regime does not optimise the revenues; we could get more revenue out of stamp duty if we had lower and different rates. Thirdly, it distorts the housing market adversely, meaning that many people are deterred from buying and selling and from obtaining the kind of housing that they most need or want by the extra charges that the Government have imposed on this most essential of goods and services.

I strongly support the Government in their wish to see home ownership promoted. As they are well aware, however, in many parts of the country house prices are high relative to incomes and have been rising in recent months as a result of the Government’s success in stimulating credit, transactions and activity in the economy again.

Although we welcome the general growth and that upward movement, as well as the fact that some extra houses are now being built, the Government must be aware that housing is extremely expensive for many people who wish to get on the first rung of the housing ladder or who would like to trade up from a smaller house to a location where they can accommodate their children and make a good family home for them.

One reason for that expense is that many people now face paying stamp duty on quite modest homes. Such people are often not rich but are having to pay substantial sums—many thousands of pounds—to the Government for the privilege of getting their first home or moving to a home that is more suited to their needs. I would hope that the Government would want to find a way of easing the burden on people who wish to buy their first home or the right home for their family, particularly if that can be done without having much or any adverse impact on revenues.

My second reason is that if we look at the pattern of stamp duties, we see that the Government have not got total revenues back to their level prior to the crash, yet we now have extra higher rates in the system. We should ask whether the rates are now acting as a kind of deterrent to people undertaking transactions, particularly at the top end of the market, leading to revenues being depressed. We need to bear in mind that in the most expensive parts of the country—indeed, in large areas of the country—house prices are now at or higher than their level before the crash. Stamp duty on shares is now also reflecting the fact that share prices are back at new highs thanks to the success of the general economic policy. There is a case for saying that we would get more transactions if we had a different structure of rates or, in some cases, lower rates, and that there would be a volume offset to the obvious loss on individual transactions.

The third reason is the damage being done to the general market. I know quite a few people who would like to move down the housing ladder—their families have left home and they could do with a smaller place—but the total costs of the transaction put them off. The fact that the buyer has to pay a large stamp duty on the house they are going to buy might be a further deterrent to the transaction taking place at all, because that will affect market prices.

We can see an obvious market distortion because the Government have inherited and lived with the slab-rate approach to stamp duty taxation. If someone moves from trying to buy a flat or house at £125,000 to trying to buy one at £125,001, they suddenly have to pay £1,250 in tax, whereas they pay none when the price is £1 lower. At the £250,000 threshold, there is a sudden slab increase of £5,000 in extra tax if the flat or house someone is trying to buy goes up from £250,000 to £250,001, and at the £500,000 threshold there is a £5,000 increase if the price goes up by £1. In practice, people will not try to sell properties at £250,000 plus a little bit or at £500,000 and a little bit, because the huge increase in tax incurred when that threshold is crossed makes that unrealistic.

We therefore now have zombie price ranges in the marketplace, in which there are very few or no transactions. People hold fire: if they have a property worth £250,000, and the market is rising, they think, “Well, I’ll wait until it is worth £275,000 or £300,000. I won’t sell now because it will be very difficult to sell at £255,000: everyone will want to knock me down by £5,000 or so, to avoid the big increase in stamp duty.” We are creating a distortion, which is another reason why there are parts of the market in which people are much more reluctant to bring their properties to the market at all, because the stamp duty is getting in the way of proper price formation.

What could be the answer to all those problems? I do not like taxes very much at all, as the Minister knows, but I know that our constituents want good schools and good hospitals, and that those cost money; I also know that we are still borrowing too much as a country. The Minister therefore has a problem and needs to maintain revenues from a variety of sources. We need a system that still enables him to collect revenue from property—that is the situation he inherited and that is the current need—but we also need one that is more likely to produce a bit more revenue while easing some of the burdens.

My first suggestion, then, is that we taper the tax rather than having a slab rate. If we put in a taper, it would make homes more affordable at £125,000 to £150,000 and at £250,000 to £300,000. The market would start to clear again in those quite popular price ranges, which are currently being restricted or removed altogether. That would also help with extra transactions.

That is how I would start off. The Minister will doubtless have some figures from his Treasury model claiming that that would produce too big a revenue loss. He will also know, however, that the Treasury has always been wildly pessimistic about any kind of Laffer effect on taxation and that the policy of cutting top-rate income tax from 50% to 45% has produced a massive surge of revenue. There was obviously no loss there, but in fact quite a big increase. Conversely, we know that moving the capital gains tax rate up from 18% to 28% has done a lot of damage to revenues and did not produce the expected increase.

The same could be true of stamp duty. We need to experiment. The Minister could try the idea at one or other of the thresholds, rather than the whole lot, if he is really nervous and cannot get the Treasury numbers changed, but we need to find out. I think I will be right. I would start at the lowest end, because that is where most people are affected and where affordability is the biggest issue of all. I urge the Minister to do that. We need more home ownership, which means having a lower and a different profile of tax, and better market clearing so that people can buy and sell and have the property they want of the size they want, which will also help. I urge him to do it for the revenue as well.