Why Stamp Duty should be scrapped

From a commercial property viewpoint an easing of credit and availability of finance for property lending will provide some real impetus to growth.  My colleague Neil Slade talked about a shortage of new development where demand exists but credit is difficult and I thought it was worth supporting Neil’s piece with a little more detail.
Well the headline from the latest Ernst & Young Item Club that “The crippling credit crunch is loosening” certainly seems to be a pointer that the availability of credit may be getting a little easier.
There is little doubt that the ongoing credit crunch and crisis in the Banks continues to affect business thinking nearly 5 years on from the start of the world’s economic woes.  The effects on property both commercial and residential are well catalogued and there for all to see – not least the retreat of values!
It is not an argument for inflating property values – what we need is more financial liquidity in the market to ‘make things happen’.
The Item Club lays bare some of the statistics around the credit crunch.  Part of their commentary was how UK Banks borrowed “£900 billion” that was borrowed from overseas up to 2008 and how we’ve been paying the price ever since as the UK reigns back from the £100 billion a year that Banks were using to fund domestic lending.
The Item Club explain that once it happened, the breakdown in the funding markets triggered several other crucial factors.  Secondary banking subsidiaries had to be supported, straining capital adequacy ratios.  Loan losses had the same effect.  Bank boards, as well as their shareholders and regulators, became very risk-averse as the losses mounted.  Tougher capital and liquidity requirements exacerbated the lending squeeze.  The ensuing recession made Banks even more worried and of specific concern for those earning their money in the property market, about the solvency of mortgage borrowers and small businesses.  Lending was depressed because the economy was depressed and vice versa, a classic vicious circle.
The Item Club thinks the background of tight credit and the Banks’ liquidity issues may be coming to an end with credit and liquidity requirements having been relaxed.  The Bank of England’s new Funding for Lending Scheme is designed to increase the flow of credit and reduce its cost, increasing the funding gap, or at least slowing the speed at which it is paid down.  It will reinforce the effect of the revival of the UK mortgage-backed securities market seen in recent weeks.
Ernst & Young say that ‘Although banks remain very risk-averse, they are effectively shifting the risk lending to affluent home buyers who have equity to invest.  In the case of first-time buyers, the builders and the government are shouldering the risk through new-buy schemes.  The banks’ capital base is also recovering’ they say.  Furthermore they comment that ‘These developments help to explain the marked improvement in the mortgage market suddenly being signalled by the Bank of England’s Credit Conditions survey, the sharpest since this survey began in 2007.  In the third quarter of this year, a significant proportion of mortgage lenders said they had loosened their lending criteria or were planning to do so, while 22% were planning to reduce the mark-up on mortgage rates.  The survey suggested that little movement in unsecured lending and forecast a continued deterioration in the outlook for lending to small companies, which it seems, are still regarded as too risky.  Nevertheless, these developments are encouraging.’
A lot of economic detail but for ‘property watchers’ and for those like us working in the property industry these are important pointers for how the market may perform over the next 12 to 24 months.
Not sure we can say this is the end of the credit crunch although we’d all hope that, it may just be the ‘end of the beginning’ thoug

A couple of years ago I wrote a Blog piece on why stamp duty is the ‘most obviously stupid tax’.  At that time the Institute for Fiscal Studies had said the tax was inefficient and damaging, they advocated a reformed council tax based upon up to date property values.

We all now know the rating revaluation has been kicked down the road until 2017 and we have had further tweaks with stamp duty rates since 2011 which all indicates the coalition government has little appetite to look at tax on property during its current tenure in office.  George Osborne is not adverse though in looking at altering tax rates on other stamp duties to make the economy more efficient – his recent budget abolished stamp duty for instance on ‘Growth’ shares predominately listed on the Alternative Investment Market (AIM).

It is possible to promote growth in the economy via changes to the stamp duty on property; just look at the incentives to companies locating in the designated enterprise zones.

The problem with current stamp duty rates are many and varied but one complaint would be the thresholds have never increased since Gordon Brown’s tenure at the Exchequer with sale price thresholds of £250,000 and £500,000 being the main mile posts.  Why does stamp duty jump from 1% to 3% from £249,999 and £250,001?

Stamp duty as a transaction tax on property is a regressive tax that tends to ‘clog’ the market up.  The tax which is levied on purchasers when they buy property impacts on our business lives as we trade property for clients and we have to be mindful and advise on the implications for stamp duty liability.

As I pointed out in 2011 the levels and differentials in stamp duty bands give added costs and proves a considerable factor in property decisions.  I still think an abolition of stamp duty and a more locally enhanced tax based on rateable value is the way forward.

The furore over the delays to rateable value reassessment continues but I would hope that 2017 may be a good target to work for a major overhaul of how we tax on property in the UK.

If you need help or assistance with any of your property decisions contact one of our team at Harris Lamb on 0121 455 9455 or email thomas.morley@harrislamb.com

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