5Stamp Duty and housing measures
Stamp Duty
77.In the Autumn Budget, the Chancellor abolished Stamp Duty Land Tax (SDLT) for first-time buyers (FTBs) on the first £300,000 of any property costing up to £500,000. For a property costing £300,000, the measure will save a FTB £5,000 in Stamp Duty. For houses above £500,000, there will be no SDLT relief at all.
78.A similar policy, known as the “Stamp Duty Holiday” existed between 25 March 2010 and 24 March 2012, first introduced by the then Chancellor, Alistair Darling76. Under the Stamp Duty Holiday, the one per cent rate of SDLT liable on the value of a property between £125,001 and £250,001 was waived, saving FTB a maximum of £1,250 in SDLT. The Coalition Agreement committed to review the effectiveness of the relief.77 The criteria for the review were the impact of the Stamp Duty Holiday on affordability and value for money, as set out in the June 2010 Budget.78 HMRC carried out the review and found that the SDLT holiday had not had a significant impact on the outcomes for FTB as intended:
The analysis concludes that the tax relief has not had a significant impact on improving affordability for first-time buyers. It is estimated that most of the people who benefitted would have purchased property in the absence of the relief anyway. First-time buyer transactions are estimated to be around zero to two per cent higher than they would have been in the absence of the relief after controlling for wider economic and credit conditions.79
As a result of this review, the Coalition Government abandoned the Stamp Duty Holiday.
79.In its November 2017 Economic and Fiscal Outlook, the OBR analysed the reduction in SDLT and forecast that it would increase prices by 0.3 per cent. However, Robert Chote told the Committee that the 0.3 per cent figure was “the average effect across all houses. The effect on the prices of those that are transacted by first-time buyers is greater than that, but obviously the vast majority of housing transactions do not involve first-time buyers”.80 The OBR’s forecast stated the reason for the increase in house prices was because the extra up front money available to FTBs would pass through quickly:
The effect of this reduction in future SDLT costs would be expected to feed through into house prices—to be ‘capitalised’—relatively quickly. Since the relief frees up FTBs’ savings to put towards higher deposits, these higher prices can be paid […] We assume that a temporary relief would feed one-for-one into house prices, but a permanent one will have twice that effect. On this basis, post-SDLT prices paid by FTBs would actually be higher with the relief than without it. Thus, the main gainers from the policy are people who already own property, not the FTBs themselves.81
80.Paul Johnson disputed whether an increase in the prices for FTB alongside a reduction in SDLT meant FTB were worse off. He said:
Stamp duty cuts do lead to price rises. The price rise can be bigger than the duty cut in part because of the leverage effect—if I pay £1 less in stamp duty I can put down £1 more deposit, meaning I can obtain a larger mortgage. So the £1 cut allows me to spend more than £1 more on a house. But this does not mean first-time buyers are worse off as a result. They are in general better off. Instead of paying, say, £100,000 for £98,000 worth of house plus £2,000 of tax they might be paying £102,000 for £102,000 worth of house. That’s a better outcome for them.82
81.The OBR acknowledge that the removal of SDLT will allow some FTBs to be able to gain access to mortgages that they otherwise would not have been able to afford:
For some potential FTBs with smaller deposits, who are constrained by loan-to-value lending criteria, the relief will enable them to borrow a multiple of their SDLT saving, allowing them to buy properties that they otherwise could not afford—but more expensively.83
The OBR estimate an additional 3,500 FTBs will purchase houses who otherwise would not have.84
82.The issue of affordability was highlighted by the Chancellor in his Budget speech:
One of the biggest challenges facing young first-time buyers is the cash required up front. […] I’ve received representations for a temporary stamp duty holiday to first-time buyers. But that would only help those ready to purchase now. And would offer nothing for the many who will need to save for years […] We have put £10 billion more money into Help to Buy equity loan to help those saving for a deposit. But I want to do more still. So, with effect from today, for all first-time buyer purchases up to £300,000, I am abolishing stamp duty altogether. […] A stamp duty cut for 95 per cent of all first-time buyers who pay stamp duty. And no stamp duty at all for 80 per cent of first-time buyers from today.85
83.The exclusion of property that cost more than £500,000 from the SDLT relief creates a cliff edge in SDLT liabilities. A property costing £500,000 will attract £10,000 in SDLT, but a house costing one additional pound will attract £15,000, as demonstrated in the chart below:
Figure 4: Stamp Duty Land Tax liability of different house prices with and without first-time buyer relief
Source: OBR Economic and Fiscal Outlook, November 2017, Box 4.3
Other housing measures
84.The Autumn Budget set out the ambition to increase housing supplyto reach 300,00086 per year by the end of this Parliament through the following measures:
- making available £15.3 billion of new financial support for housing over the next five years, bringing total support for housing to at least £44 billion over this period,
- introducing planning reforms that will ensure more land is available for housing, and that better use is made of underused land in our cities and towns, and
- providing £204 million of funding for innovation and skills in the construction sector, including to train a workforce to build new homes.87
85.In addition, the Budget announced the lifting of the Local Authority Housing Revenue Account borrowing caps for:
councils in areas of high affordability pressure, so they can build more council homes. Local authorities will be invited to bid for increases in their caps from 2019–20, up to a total of £1 billion by the end of 2021–22. The Government will monitor how authorities respond to this opportunity, and consider whether any further action is needed.88
While the Budget document stated the bidding process will aimed at areas with high affordability pressure, the Chancellor stated in his speech that the bidding process will be aimed at councils in “high demand areas.”89
86.The OBR revised down its forecast for residential investment in its Economic and Fiscal Outlook despite the Government’s policy announcements:
We expect relatively subdued growth in residential investment over the forecast period. Near-term growth in housebuilding is expected to slow due to low turnover in the housing market and modestly higher interest rates. Residential investment is expected to grow more slowly than in March due to the downward revisions we have made to our house price and transaction forecasts. As a share of GDP, total private residential investment is expected to remain below its pre-crisis peak throughout the forecast period.90
87.Data from the ONS (see chart below) shows that the UK has not succeeded in building 300,000 houses in a single year since 1977. Between the period 1953–1977, the UK consistently completed over 300,000 tenures per year. During this period, local authorities were on average constructing 156,000 tenures per year, privately constructed tenures numbered on average 165,000 per year, with housing associations completing 13,000 tenures per year. Since that period, privately constructed tenures have consistently averaged around 150,000 constructions per year with housing associations averaging 24,000 per year. For the last 30 years, local authority constructed tenures have averaged 4,000 per year.
Figure 5: Level of housebuilding by sector
Source: Office for National Statistics: Table 241, House building: UK permanent dwellings completed, by tenure
88.Nick Forbes, Senior Vice Chair, Local Government Association, told the Committee that the only time the UK came close to building 300,000 houses local authorities contributed significantly:
The last time we [the UK] built more than 250,000 homes, councils built 40 per cent of them. The 300,000 target will only be achieved if councils are allowed to get on and deliver the homes that we want to deliver but cannot because of the constraints upon the way that the system works at the moment.91
89.At present local authorities are limited in how much they can build through the cap on borrowing within Local Authority Housing Revenue Accounts. Nick Forbes did not think the increases in local authority borrowing announced in the Budget were sufficient. He told the Committee:
Rather than having a competitive process, it is better to lift the borrowing cap for all local authorities, so that we can all get on and take the decisions that are in the interests of our respective communities. We have a situation where most of the HRAs for local authorities are operating within 10 per cent or 20 per cent of their cap, so the flexibility to manoeuvre is very limited.92
90.In addition to criticising not allowing all local authorities to increase their Housing Revenue Account borrowing caps, Nick Forbes also expressed concern about the timescale and the use of a bidding process to allocate money to local authorities based on “areas of high affordability pressure”:
there was a slight disparity in the announcement that the Chancellor made and the language in the Budget book, because areas of low affordability are not necessarily areas of high demand. It is possible to have high demand in areas of high affordability93 […] we could do more and faster, if we were allowed to get on with it sooner.94
91.Brian Berry, Chief Executive, Federation of Master Builders, told the Committee that the reduction of small housebuilders in the market had reduced construction levels:
SME housebuilders have, over the last 25 years, been effectively squeezed out. In the late 1980s, two thirds of all new homes were built by SME housebuilders. Last year that had fallen to 23 per cent so, if we are going to get the numbers up, we need to revitalise and overcome the barriers that SME housebuilders face. There are three major barriers: access to land, access to finance and the complexities of the planning system. […] The measures that were announced in the Budget were a welcome step, but the Secretary of State for Communities and Local Government himself was starting to talk about a £50 billion investment in housing over the next period. £1 billion for HRAs and £8 billion in total go some way towards that, but it is not necessarily going to meet the scale of the challenge that we face.95
92.David Orr Chief Executive, National Housing Federation, told the Committee there were “no silver bullets” to increase housing supply quickly.96 When asked whether the measures announced in the Budget actually did much to address the issues that are of fundamental importance to unlock more housing being built in the UK, Mr Orr said that the Budget:
identified all the important issues but did not quite do the things that we need to see done.97
93.The changes to Stamp Duty Land Tax (SDLT) in the Budget helps first-time buyers by reducing the sum of money needed to save to purchase a house. However, the OBR forecasts that just 3,500 additional first-time buyers over the forecast period will enter the market as a result of the policy change, at a cost of £3.2 billion. There needs to be a step change to helping first-time buyers purchase a home.
94.The OBR forecasts that a permanent reduction in SDLT in isolation will increase the affected first-time buyer house prices by double the reduction in SDLT. The previous ‘Stamp Duty Holiday’, which was in operation from March 2010 to March 2012, was found by HMRC not to have increased affordability, and to have resulted in an increase in the number of first-time buyers of “between zero and two per cent”.
95.The new SDLT schedule creates a cliff edge at the £500,000 price point, which will create distortions to the housing market. A house worth £500,000 will attract £5,000 less in SDLT than a house worth £500,001. When the previous Government redesigned SDLT to remove ‘cliff edges’ faced at certain property values, the then Chancellor said that he had reformed a “badly designed system that has distorted our housing market for decades”. It is regrettable that the abolition of SDLT for first-time buyers reintroduces a cliff edge into the SDLT schedule.
96.The eligibility for SDLT relief for first-time buyers being extended to houses worth up to £500,000 recognises that previous measures aimed at first-time buyers such as the Help-to-Buy ISA (which were capped at £450,000) excluded some parts of the country. The Committee notes such a recognition.
97.The only sustainable way to address housing market affordability, both for first-time buyers and other households, including those in the rental sector, is to significantly increase the supply of new housing. The Autumn Budget alone is unlikely to achieve this.
98.Despite the Government’s latest housing announcements, the OBR has reduced its residential investment forecast since the Spring Budget. Residential investment is forecast to remain below levels prevailing prior to the financial crisis, a period when housebuilding was considerably below the Government’s new target.
99.Over the past 60 years, private housebuilders have consistently provided around 150,000 units per year. Given this historical record, it is unlikely that the Government’s target of 300,000 new homes per year will be met without a significant increase in the supply of units provided, either directly or indirectly, by local authorities and by housing associations.
100.The decision in the Budget to raise the Housing Revenue Account borrowing cap by £1 billion is a positive step. However, in order to increase Local Authority construction to levels sufficient to meet the Government’s 300,000 target, the Housing Revenue Account borrowing cap should be removed. Raising the cap would have no material impact on the national debt, but could result in a substantial increase in the supply of housing, allowing local authorities to determine the level of additional housing needed in their area.
101.The bidding process proposed by the Treasury to allocate the additional £1 billion of local authority housing revenue borrowing may not direct resources to areas of greatest housing need. The criteria for allocation are currently unclear. The Chancellor stated in his speech that the bidding process will be aimed at “high demand areas” but the Budget itself referred to “areas with high affordability pressure”. The Treasury should establish clearly defined, needs-based criteria for allocating the additional borrowing.
102.Greater measures are needed to increase housing supply. 300,000 homes a year will not be achieved with the current measures. The Government will need to show greater commitment to housing supply to achieve its aspiration and will need to bring forward additional policy measures.
76 HM Revenue and Customs, Working Paper 13: Evaluating the Impact of Stamp Duty Land Tax First Time Buyer’s Relief, November 2011
77 HM Government, The Coalition: Our Programme for Government, May 2010, page 12
79 HM Revenue and Customs, Working Paper 13: Evaluating the Impact of Stamp Duty Land Tax First Time Buyer’s Relief, November 2011
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82 Institute for Fiscal Studies, ‘Autumn Budget analysis 2017: opening remarks and summary’, accessed 17 January 2018
84 Office for Budget Responsibility, Economic and Fiscal Outlook, Cm9530, November 2017, Paragraph A.12
85 HM Treasury, ‘Autumn Budget 2017: Philip Hammond’s speech’, accessed 17 January 2018
86 The 300,000 target is an England only target. Housing is a devolved policy.
89 HM Treasury, ‘Autumn Budget 2017: Philip Hammond’s speech’, accessed 17 January 2018
91 Q2
92 Q7
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19 January 2018