The UK’s worst tax… stamp duty

The UK’s worst tax… stamp duty

UPDATE: In March 2012 Martin ran a competition to redesign Stamp Duty.

A journalist recently asked me what I thought the UK’s most bizarre tax was. My answer, without any hesitation was stamp duty. Now I know inheritance tax haters may disagree, but for me, it’s not so much ‘what’s being taxed’, but ‘how we’re taxed’ that’s the real problem.

My problem with stamp duty isn’t that it is taxing property; in fact with the vast rise in house prices, by taxing property we cream a little off the country’s landowners and give it to those generally with less assets, it’s not even the rate that’s charges; it’s the way it’s set up that is without doubt…. stupid, stupid, stupid.

How stamp duty works.

The buyer pays the stamp duty (tax) based on the price of the property being bought.

  • Property price less than £125,001– no stamp duty.
  • Property price £125,001 to £250,000 and it’s 1% stamp duty.
  • Property price £250,001 to £500,000 and it’s 3% stamp duty.
  • Property price £500,001+ and it’s 4% stamp duty.

What’s the problem?

The ridiculous anomaly here is the stamp duty tax rate is set at an absolute rather than marginal level. In other words, rather than you paying 1% stamp duty on everything above £125,000 you pay 1% on the whole amount. If you’re still confused…. the following examples show the nonsense.

  • Property price £125,000. Stamp duty = £0.
  • Property price £125,001. Stamp duty =£1,250.
  • Property price £250,000. Stamp duty = £2,500.
  • Property price £250,001. Stamp duty = £7,500.

So by increasing the cost of the property by just £1, you increase the tax by £5,000 meaning no buyer in their right mind will go for it!

What should be done?

This really is absurd and irrational.

The only current practical solution available, is where you can (within the law) if you’re close to the boundaries; sell fixtures and fittings separately to get you round this (more info in the guides to Cheap Mortgages and Cheap Remortgages).

Yet the real solution is a reworking of the tax system. Frankly it’s shocking that a man as bright as Gordon Brown hasn’t thought to do this, and didn’t take the opportunity to do so at various budgets when he’s changed stamp duty.

It’s possible the reason he’s avoided doing this is he thinks the UK public aren’t bright enough to understand that to get it to work properly you’d need to set the marginal tax rate higher than the absolute rate, so it sounds like it’s a tax increase, even though most people would pay less.

Now I haven’t done the maths properly but purely for the sake of example, let’s say stamp duty were set at 2.5% of everything above £120,000; while it sounds like an increase, for many it would mean the opposite.

  • Property price £100,000. Stamp duty now £0. Stamp duty if changed – £0.
  • Property price £125,000. Stamp duty now £0. Stamp duty if changed – £125.
  • Property price £125,001. Stamp duty now £1,250. Stamp duty if changed – £125.
  • Property price £200,000. Stamp duty now £2,000. Stamp duty if changed – £2000.
  • Property price £250,000. Stamp duty now £2,500. Stamp duty if changed – £3,250.
  • Property price £250,001. Stamp duty now £7,500. Stamp duty if changed – £3,250.

Now of course do to this properly you’d need different tiers and tax matching. Yet even the above quick example shows there’s a much more fair way to do the whole thing.

If I were writing an article now, I think with 30 minutes work I could’ve come up with some reasonable tiers to come close to matching the current system but without the unfair steps (ie, like income tax, above certain tiers you pay a higher percentage). Surely it isn’t beyond Mr Brown and his Treasury?

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