Slashing stamp duty would be a wise move

The ‘rabbit out of the hat’ in Kwasi Kwarteng’s mini budget this Friday is likely to be a cut in stamp duty on property purchases. If so, it will be a popular and wise decision. Not only might it help generate extra activity in a housing market which looks like flagging as interest rates bite – or maybe mitigate a decline in activity – it should help to promote labour mobility by making it easier for job-seekers to move around the country to look for work or further their careers. Moreover, depending on at what level it is set, a stamp duty cut might well generate extra revenue, too. 

Never was there a better demonstration of the Laffer Curve in action than with stamp duty in the UK property market. In spite of hikes in stamp duty by then chancellor George Osborne, stamp duty receipts struggled to reach the peak they had achieved on the eve of the 2008/09 financial crisis. Yet when Rishi Sunak slashed stamp duty at the beginning of the pandemic, stamp duty receipts rapidly recovered, and by 2021 were surpassing pre-pandemic highs. 

Why? Because suddenly more people were moving home, making it clear just how much stamp duty had been dissuading people from moving. While the 2010s saw a sustained rise in house prices, the volume of sales never recovered to the levels they were prior to the 2008/09 crisis – until the stamp duty holiday began to take effect.

There is a pretty strong moral to the story: if government wants to maximise its revenue from stamp duty – or any other tax for that matter – it can’t do so by endlessly jacking up tax rates. From the point of view of raising revenue, there will be an optimum tax rate. In the case of stamp duty, this appears to be lower than the current rates being charged. It is hardly surprising that people have been dissuaded from moving home by high stamp duty rates. To buy a £500,000 property will currently cost buyers a whacking £15,000 in tax: this is more income tax than someone on a salary of £50,000 will pay in a year.

There is another moral to the tale. If Kwasi Kwarteng wants to achieve an orderly housing market, rather than to precipitate another boom-bust cycle, he shouldn’t do as Sunak did and announce a time-limited stamp duty holiday. Instead he should reduce rates on a permanent basis. 

The trouble with Sunak’s stamp duty holiday is that it sparked a mad rush to complete sales by the deadline. Once that deadline passed, activity in the housing market fell – although prices have yet to follow the decline in transactions. It is a similar story to the mad boom that was encouraged by Nigel Lawson’s pre-announcement of a date to end double mortgage interest rate relief in 1988. Once that deadline had passed, the housing market stalled, and later crashed. Kwarteng would be wise to avoid falling into this trap when it comes to his stamp duty announcement.