Stamp duty is popular with the Treasury – last year it raised around £6.5bn, up from just £830m in 1997-1998. So, how does it work? The Inland Revenue levies the tax every time a “registered” asset changes hands. At one time, the relevant documents transferring ownership used to be “stamped” to show that the tax had been paid, hence the name. Today, the two key examples of registered assets affected are shares and property.
Every British firm has a legal obligation to maintain a register recording who owns its shares, while a change in property ownership must be logged with the Land Registry.
Always paid by the buyer, the rate depends on the asset. For shares it is 0.5% of the purchase price; on a deal worth £5,000, that’s £25. For property, on homes worth less than £125,000 there is no stamp duty. From £125,001 to £250,000, the rate is a flat 1%; from £250,001 to £500,000 it is 3%; and from £500,001 it is 4%.
So, anyone buying a £600,000 home would pay £24,000. It’s a nice little earner for the Treasury, but even by taxation standards, stamp duty is unpopular. Firstly, levying tax at a flat, rather than graduated, rate distorts the market. A £240,000 house would incur £2,400 stamp duty; but for a home worth £260,000, it jumps to £7,800. This creates ‘bottlenecks’ around certain price points. Secondly, the valuation bands have barely budged in ten years – the only recent concession was the raising of the 0% band from £60,000 to £125,000 in 2006 – yet UK house prices have roughly tripled over the same period, creating a huge Government windfall. Thirdly, actual re-registration costs for shares and property are minimal and don’t vary in the way this tax suggests.
Finally, given that few UK properties now cost less than £125,000, stamp duty, which must be settled at the time of the deal, penalises cash-strapped first-time buyers. Similarly, the London Stock Exchange argues that the 0.5% levied on shares, for which there are few equivalents overseas, hurts the competitiveness of the British equity market.