I was at conference last week and in a policy debate where an amendment about higher stamp duty for properties bought simply for foreign investment was rejected. The proposer Anood Al-Samerai spoke passionately about the damage that empty homes are causing to the sense of community in her area, just at the time when thousands of families across London cannot afford to buy their own house. However the amendment was voted down as it would have been very hard to administer ( Who qualifies for the extra stamp duty? Is it anti investment, anti foreigner?)
This got me thinking about Stamp Duty and the peculiarity of Capital Gains tax exemptions on the property that’s your ‘primary residence’. Primary Residence Relief is a tax break that most of us enjoy when selling our family home – if the house is where you live and isn’t being used for a business, you don’t pay capital gains tax on any gain you make when you sell the house.
I’m sure this is a very popular tax relief, but seems an anomaly in an objective sense. Probably the biggest financial transaction (and profit) most people will make in their life attracts no tax? Combine this with the oddity of Stamp Duty, a tax that dates back to the 1600’s that hits the people who can least afford it (the buyers) and has been described as unjust and a brake on growth
Should We Tax Gains On Your ‘Primary Residence’?
Objectively, some form of tax applied to the gains you make on your primary residence has a lot going for it – it would bring in large amounts of revenue as a market overheated and prices rose rapidly, but very little when the market was in recession. The value of self balancing systems can’t be underestimated.
Furthermore the tax could be levied only on excessive gains that the government of the day believes are damaging to society. We could say as the Institute Of Chartered Surveyors said recently that price rises of 5% yearly are acceptable, but any gains over that amount could be be subject to this tax.
A ‘New Homes’ Levy
Any money raised locally by this tax could given to the local authority where the house was sold to build new social housing, thus increasing the supply of property in that area during times of high demand. The data to calculate this new tax is complete, accurate and publicly available at the land registry and the tax could be paid for during the transaction of the house sale, much as stamp duty is today.
What about Stamp Duty?
With this system in place we could decide to remove stamp duty altogether and gather revenue just from sales which would help first time buyers in particular, or keep both but have them at a lower rate if it would be more politically acceptable.
What About Our Foreign Investors?
This New Homes Levy could also be applied on top of existing capital gain taxation that businesses pay, effectively creating a higher rate of capital gains tax on properties in areas where house prices are rising extremely quickly. The hope would be this would deter the capital flows coming into some parts of London, with that money going elsewhere in the world where it can attract better returns. And if it doesn’t we’re getting revenue for new social housing in areas that need it most.
So There You Have It
To me this seems like a tidy proposal, it ticks the things I like to see when designing videogame systems
- Its Fair – The tax is only applied to those who have made large gains on their homes, not to everyone who buys a house as stamp duty is currently. The more you’ve made the more you pay and you only pay it when yo have the money (on the sale of the house).
- Its Tunable – By tweaking the amount of relief per year we can create a system that taxes extreme profits on housing (say over 10% year on year) or is set at a level around 5%, or anything in between.
- Its Self Balancing – If the money earned is put back into local housing, it balances itself as during periods of housing demand in specific regions (e.g. London) it generates funds locally for new housing locally and in periods of recession attracts very little revenue and doesn’t hold back slow markets as stamp duty does.
- Its Enforceable And Not Cheatable – The biggest criticism of the Stamp Duty amendment at conference, we have all the data we need to enforce this tax, a method to collect it and the money is always there to pay the tax when the house is sold.
- It Sends A Signal – That property purely as an investment vehicle will no longer be tolerated. That money will go elsewhere in the world and the problems our Stamp Duty amendment discussed at the top of this post will hopefully be ameliorated.
What’s Wrong With It?
It may feel unfair to the family who have been in a house in London for years and then come to sell and get hit by a huge levy. This could be solved this by setting a maximum cap on tax – say a percentage of the total sale like 10%. Another solution is to only apply it to subsequent house transactions once the policy has been announced (the seller of the house in London doesn’t pay the tax, but the next person to sell the house does).
Another problem could be it increases house prices further, as sellers simply put on the cost of the levy onto their asking prices. However you could argue this is already happening as people take into account stamp duty costs.
What do you think?
I’d love to hear what you think. I have no experience of crafting tax policy, just principles of good design I’ve learned through my career, backed up by my Economics degree.
Maybe it would just be too politically unpopular by those who have made a tidy sum on their home over the years. Even then I believe it could be brought in on properties that have risen enormously in price very quickly and then made tighter as people get used to the idea.
- Stamp duty is unjust, and a brake on growth (telegraph.co.uk)
- Buyers are hit hard by ‘punitive’ stamp duty (thetimes.co.uk)
- Stamp Duty Should Be Abolished: REIA (platinumincentive.wordpress.com)