The Options To Replace Stamp Duty – And How It Could Affect You

Plans from the Tories to cut stamp duty on primary residences could see other payments such as council tax being reformed as a result, a leading fiscal policy analyst has said.

Kemi Badenoch made the pledge in her closing speech at the party’s conference in Manchester, with the opposition leader calling on Rachel Reeves to cut taxes in an effort to boost growth.

Stamp duty is paid on the purchase of a property of between 5-12 per cent depending on the property’s value, with the first £125,000 exempt. It is criticised for the considerable cost it can add, especially to first-time buyers, and so holding back the housing market.

The move would see stamp duty still being applied to second homes and comes as part of Badenoch’s new “golden rule” to spend half of public savings on tax cuts and other growth-boosting measures and half on deficit reduction.

Council tax reforms to curb stamp duty cuts

The Institute for Fiscal Studies (IFS) has estimated that abolishing stamp duty on primary residences will cost around £4.5bn.

Helen Miller, director of the IFS, said that while cutting stamp duty would not be a difficult change to implement, accounting for such a move financially would be more complicated.

She told The i Paper: “The question is really how you pay for it, and I think that’s going to be the challenge compared to what the Conservatives put out.

“It’s notable to me that they have set out a very specific tax cut but not such specific spending cuts to pay for that.”

The Conservative Party leader’s plans have been scrutinised by analysts (Photo: Christopher Furlong/Getty Images)

Badenoch said her stamp duty pledge would be funded from £47bn of savings identified by the Tories, including £23bn slashed from the welfare budget, a near-scrapping of overseas aid with £6.9bn of further cuts, and £3.9bn of saving from the affordable homes programme, among other measures.

Miller suggested introducing a reformed council tax system as a way to replace stamp duty, likening the proposal to a combined tax on land and what economists would describe as a tax on the “consumption value of your home”.

She said: “Council tax is currently horribly out of date. It’s regressive and got lots of problems. I think a good end goal here would be to reform council tax, or scrap it and get a new tax in a similar form, that is based on up to date values and it is proportional to those values rather than regressive.”

Scrapping business rates for land value tax

The fiscal analyst added that land on which businesses are based should be entitled to separate tax systems, given such plots would be contributing to the economy.

She said: “If we were talking about business properties then I think actually what you want to do there is only tax the value of the land.

“In that part of the tax system, I would be advocating for getting rid of business rates and replacing that with a land value tax.”

Development tax for new approved planning proposals

Miller said another option would be to levy a tax on patches of land that have received planning permission for major projects to reflect their increased value.

She said: “We have had things like development taxes in the past. There’s various ways to do those, things like when a local authority grants planning permission, the value of the land often increases so you can do things to capture that value.”

Capital gains tax ‘dead in the water’

She noted that capital gains tax represented a sensible route into accommodating a removal of stamp duty, but said such a proposal was unlikely to be sustainable politically.

“If we were starting from a blank piece of paper, then I think there would be a very good reason to put capital gains tax onto main homes. But we are not starting on a blank piece of paper and I think this is a case where you just can’t do that politically. 

“If a government said they were going to put a capital gains on main homes, the opposition party would pledge to delete that and none of us would sell our homes and realise those capital gains, so that’s an idea that in my mind is dead in the water.”

The director said stamp duty had gradually increased over the past 15 years as a method by politicians to subtly raise revenue. 

She added that while the tax was generally considered unpopular, it does not appear to affect residents as uniformly as other payments.

“It has a much bigger effect in parts of the country where house prices are higher. If you’re trying to buy a house in London or the home counties, it will be the first thing you think of whereas if you’re buying a house in other parts of the country it won’t matter as much.

“The other thing is that obviously at the point during which you’re moving house, [stamp duty] is a huge deal, but most people most years aren’t moving house. So in that sense they would see income tax, national insurance or VAT [changes] more directly.”