What is Stamp Duty

Stamp Duty Land Tax(SDLT) is charged on house price sales in the UK. It is certainly not a particularly well designed and it causes some quite interesting distortions on the property market.

It is typically a large part of the cost of purchasing a home.

 

 

Stamp Duty Bands

Purchase price of property	Rate of SDLT (percentage of the total purchase price)
£0 - £125,000	0%
£125,001 - £250,000	1%
£250,001 - £500,000	3%
£500,001 - £1 million	4%
Over £1 million - £2 million	5%
Over £2 million	7%
Over £2 million bought by corporate bodies	15%

 Source: HMRC as at July 2013

In addition there were lower rates for certain parts of the country that are deemed to be in need of regeneration, although this has been abolished.

The key thing about it is that you pay the percentage on the whole proportion of the purchase price. So if you buy a house for £250,000 the stamp duty is £2,500. If you buy a property at £250,001 the stamp duty is £7,500.  This may sound a bit weird, I don't think there are many people who disagree!

The chart shows the number of house price sales in May 2013 by the value of the sale. All this means that houses don't really sell for between £250k and £260k.  There are smaller distortions at £125k and £500k.

 Avoidance?

There are various ruses that people sometimes use to get around stamp duty rates. For people transacting at the £250k threshold these typically include selling the house for just under £250k and then selling things like carpets and curtains for more. Stamp duty is only paid on the value of the property and not any items that are sold with it.  However HMRC is aware of this and the extra items need to be sold at a market value, and in practice these items tend to have a low price.

Further up the income scale there were more complex schemes involving limited companies or schemes involving husbands and wives transfering part of the property between themselves. There has been a crackdown on stamp duty tax avoidance and so neither is as likely to work.These schemes are also legally complex and therefore expensive.

Poorly designed tax?

The structure of stamp duty is poorly designed as there are huge cliffs where just a few pounds results in thousands of pounds in additional tax. This seems quite unfair and has encouraged much avoidance.

You can also argue that the a tax on selling land makes less sense than a tax on owning it. Allowing people to move around to find jobs or be close to their families is not really a bad thing. A more logical tax would be a smaller tax for land ownership.