On balance, history will be kind to George Osborne’s six years as Chancellor. He stabilised an economy that was in dire straits when he took over. He brought the deficit under control while avoiding a serious recession, a trick that is far easier in economics textbooks than it is in the real world. He pumped money and time into reviving the north, and he played a key campaign role in delivering the first majority Conservative government in three decades.
If he made one massive mistake, however, it was this. He took a housing market that was already dysfunctional, and, by introducing a raft of changes to stamp duty, he achieved the almost unimaginable feat of making it even worse. His policies turned it into a huge money-spinner for the Treasury but slowed down the number of house sales, reduced labour mobility and laid waste to the once-booming buy-to-let sector. If you were searching for a laboratory experiment in why governments are almost invariably best advised to keep out of markets, you could hardly find a better one.
Re-wind the clock a couple of decades, and stamp duty was a minor item on the tax menu. Stamp duties have in fact been around since the 1600s, but the current system of taxing home sales dates from the 1950s. For a long time, tweaks were mercifully infrequent. All through Margaret Thatcher’s reign, for example, you paid nothing on a purchase price of up to £30,000 (in those days you could still buy a house for less than that, although admittedly not in Chelsea) and 1 per cent above it. In 1993, the threshold was doubled to £60,000 to reflect higher house prices. For many years, that was about it. Stamp duty was a simple and stable levy consonant with the established principle that the state should collect a modest and painless slice whenever significant assets change hands.
The rot set in — surprise, surprise — with Gordon Brown. As Chancellor, he couldn’t look at a tax without wanting to find a fiddly way of increasing it, preferably by stealth. A single stamp-duty rate suddenly became four rates, from zero per cent up to £60,000 to 2 per cent over £500,000. There were more changes in 1998, 1999 and 2000 — Brown knew how to enjoy himself — until the top rate reached 4 per cent. He and his successor as Chancellor, Alistair Darling, carried on tinkering with the rates until Darling’s parting shot before Labour left office in 2010, which introduced five levels of duty with a top rate of 5 per cent on houses over £1 million.
Simplicity and stability were a thing of the past. But if Brown started the rot, it was Osborne who really focused on stamp duty as an instrument of economic engineering, introducing punitive rates that hit the top end of the market hardest. In 2012, the Tory Chancellor brought in a new rate of 7 per cent for any transaction worth more than £2 million. Then in 2014, he overhauled the system again, introducing tiered rates, so you paid percentages of each chunk of the price. Over £925,000, the rate went up to 10 per cent and over £1.5 million it was now 12 per cent.
These changes were even more dramatic for the growing army of buy-to-let landlords, or anyone buying a second home, unless they did so through a company. From £40,000 upwards they started paying extra stamp duty, rising to 13 per cent over £925,000 and 15 per cent over £1.5 million. The transformation of a tax that used to be a minor expense, on a par with the solicitor’s fees and the cost of the removal van, was now complete. People buying houses in London and the south-east now routinely pay a year’s salary or more in stamp duty.
The impact has been huge. According to an analysis by Nationwide, the amount collected has soared. The Treasury now rakes in close on
£13 billion a year from stamp duty, more than twice the amount from inheritance tax. But the number of transactions has tumbled to the lowest in a decade.
In London, where these stratospheric rates of duty are biting hardest, the market has virtually frozen. Sales have all but ground to a halt. In Wandsworth, for example, there were just 105 sales in February this year compared with 270 in February 2016, according to Land Registry figures. Westminster saw only 55 sales. Overall, the figures are the lowest on record. Meanwhile, prices have fallen by more than 15 per cent in boroughs such as Kensington and Westminster, with a 6.6 per cent overall fall across the capital in the past year.
The impact on the buy-to-let market has been even more dramatic. The number of buy-to-let mortgages available, a good indicator of the level of interest in the sector, has fallen to its lowest level since the immediate aftermath of the financial crash of 2009. The Council of Mortgage Lenders reports that around 6,000 new purchases a month are being made with buy-to-let mortgages, compared with a peak of up to 11,000 in 2015.
There are ways around the new taxes. Lots of landlords are setting up companies, but that is expensive, and only really worthwhile if you have three or four properties; plus you can’t transfer existing assets into a company without paying stamp duty and capital gains tax. Couples might find they can get around the second- home rate by getting divorced. But that’s a pretty extreme way of sidestepping a tax, and probably not the best preparation for buying that idyllic cottage in Cornwall you’ve always talked about. In reality, stamp duty is a very hard tax to avoid, and the new system has been well designed to stop loopholes emerging.
That does not mean it is a success, however. Brown saw it as an easy way of raising money, while Osborne saw it as a way of being seen to tax the rich while also curbing buy-to-let landlords, who, as he saw it, were driving up house prices. In fairness, it has raised a lot of money for the Treasury. But it is also distorting the housing market. There are three big problems. First, for many people it makes moving prohibitively expensive. Anyone swapping a £1 million home for another one in a different part of the country — because of a change of job, say — will have to pay £43,750 of duty. And yet mobility is obviously good for the economy.
Next, the duty rates encourage older people to stay in big homes they no longer really need. It would often be better for all concerned if they down-sized and sold the family house, but buyers may now be few and far between. Finally, it has deliberately hammered landlords. But an economy with a flexible labour market plus lots of immigrants and lots of students, also needs lots of rental properties. As buy-to-let is discouraged, rents must go up — and that won’t help anyone.
In reality, the housing market is already creaking under the weight of manipulation by the government. From planning restrictions to rules on borrowing to subsidies for first-time buyers and these hefty taxes on purchases, the state is meddling all over the place. The result? Far too few new homes are being built, too few people can afford to get on the ladder, and moving costs are soaring out of control. The stamp duty spiral has taken a mess and made a fiasco. The best thing we could do now would be to go back to a 1 per cent rate on every transaction, and leave that in place for a couple of decades. It couldn’t be any worse than what we have now – and might well be a lot better.