Updated: Oct 8, 2019
LUDGROVE NEWSLETTER (JULY 2019)
“... as the great Tunisian scholar and sage Ibn Khaldun pointed out as early as the 14th century, there are plenty of taxes that you can cut which will actually increase your revenues and there are ways of making sure that you can stimulate growth, you stimulate enterprise and you get more in.”
Boris Johnson 30.06.19
In recent weeks Prime Minister Johnson has indicated his desire to pass a pre-emptive 'No-Deal Budget' so the economy is "going gangbusters" by October 31st - deal or no deal. He is said to be considering an abolition of Stamp Duty on residential property transactions up to £500,000, reversing George Osbourne's 2014 tax rates on more expensive homes and moving the burden of Stamp Duty from the Buyer to The Vendor.
Ludgrove has analysed the impact of a reduction in Stamp Duty to see if a cut in tax rates can indeed as Mr Johnson says result in stimulating economic growth and tax revenue. We considered various scenarios based on historical Stamp Duty rates and conclude a -36% reduction in Stamp Duty rates across the board is likely to lead to +40% additional transactions in England per annum, in turn generating an extra £1.44 bn in tax revenue and £8.36bn in business revenue. Taken together this represents a £9.8bn tax and growth opportunity for the Economy.
Context: The Current Stamp Duty Regime Has Created a Dysfunctional Market
Before we go further it is worth putting today's Stamp Duty regime in context. In order for a property transaction tax to be successful it must be one where the tax is affordable and at the same time generates a healthy level of property transactions and economic activity (upon which tax itself is derived). Unfortunately the current policy has failed on all three fronts.
Firstly Stamp Duty is woefully unaffordable. Ludgrove has calculated the number of years an Individual would need to save to pay the Stamp Duty on the average property and plotted how this ratio has evolved over time. Remarkably the Buyer of the average London property today requires 13.7 years of savings to purchase the average London property (versus 1.1 years in 2001). In England the figure is 3.2 years today (compared to 0.7 years in 2001).
For London, house price inflation has played only a small part in this increase - our analysis shows 75% of the rise in London is explained by the increase in tax rates and just 25% by house price inflation. For a Conservative Party that believes in a "home-owning democracy" we find this astonishing and especially so, given the fact the ratio has increased from 3.7 years to 14 years since The Conservatives came to office in 2010.
Secondly punitively high rates of taxation (notably the 10% and 12% rates introduced in 2014) have led to what can only be described as a depression in high value property turnover which in turn has 'gummed up' the entire property chain and significantly reduced mainstream transactions. The chart below shows how transactions have slumped in London's Top 5 Boroughs by value. Here transactions were 50% higher before the December 2014 Stamp Duty changes than they are today. In the wider London property market transactions were +35% higher in 2014.
Any Estate Agent or Buying Agent in Central London will tell you from first-hand experience the higher rates of Stamp Duty has caused this problem. However to empirically assess whether Stamp Duty changes is to blame we carried out a statistical correlation analysis. Here the results were unsurprising and showed that since 2014 there has been a 98% inverse correlation between movement in the top rate of Stamp Duty and London property transactions. Statisticians would call this a "smoking gun", proving that higher rate Stamp Duty changes are almost certainly responsible for the fall in mainstream London transactions over the period.
The current Stamp Duty regime has also failed to stimulate economic activity. In our report on Stamp Duty from November 2018 Ludgrove calculated the fall in London property transactions sine 2014 has led to the loss of approximately £2.7 billion in Business Revenue in that region alone. Estate Agents, Lawyers, Surveyors, Builders, Removal Firms, Interior Designers, Mortgage Brokers, Architects, Surveyors and so on have all felt the pain.
Current policy therefore has clearly resulted in a dysfunctional market. Unaffordably high taxes have discouraged transactions and 'gummed-up' the property chain. Significantly lower transactions have reduced both business revenue and indirect taxes from property related activity.
Stamp Duty: The £9.8bn Opportunity
Unlike previous studies that purely focus on the impact a cut in tax rates would have on Stamp Duty receipts itself, our analysis looks at the impact on what really matters - total tax revenue. By including an estimate of indirect taxes from property related activity associated with each transaction (ie VAT, Corporation and Employment Taxes from areas such as Estate Agency, Legal & Removal fees) alongside Stamp Duty receipts, Ludgrove has achieved a more comprehensive assessment of the effect of a Stamp Duty tax cut on total tax revenue. Our analysis also includes an estimate for the increase in business revenue derived from higher property transactions a consequence of a tax cut.
Our starting point was to discover the business and tax revenue associated with each property transaction. Here we found:
The average property transaction in England generates £20,441 in business revenue and £14,703 in direct and indirect tax revenue.
Of the £14,703 in total tax revenue £8,866 per transaction is gathered directly from Stamp Duty and £5,837 indirectly from property related activity/transactions (ie VAT, Corporation & Employment Taxes on property related business activity).
40% of the tax revenue per transaction (ie £5,837) is collected via indirect taxes.
Looking at the relationship between transactions and tax rates we can see from history that across England as a whole transactions were 40% higher when the average Stamp Duty bill was -36% lower (at 1.93% versus 3.01% today), implying a 1/1.1 inverse relationship between tax rates and transactions. In the higher value London market the sensitivity is higher. Here transactions were 63% higher when the average Stamp Duty payable was 45% below today's rate (2.7% tax rate vs 5% today). This represents a sensitivity between tax and transactions (or Beta in statistical parlance) of 1.4x. In other words if the average Stamp Duty Bill was cut by -36% in London there is good reason to believe London transactions could be +50% higher.
Nevertheless we have assumed a 36% reduction in Stamp Duty will generate a 40% increase in transactions in England (ie 1.43m transaction vs 1.023m in 2018). Inputting this into our model we find a 36% cut in Stamp Duty would have the following effect:
A Net Gain in Total Tax Revenue of £1.44bn (+10%): consisting of a £2.38bn increase in indirect Tax Revenue (VAT, Corporation & Employment Tax) from property transaction related business activity, offset by a £0.94bn decline in Stamp Duty Revenue.
A £8.36bn or 40% increase in Business Revenues from property related activity.
A combined £9.8bn increase in Tax and Business Revenue.
The above supports Mr Johnson's case for Stamp Duty cuts and is an illustration of what Economists refers to as 'The Laffer Curve', namely that tax cuts can generate more tax revenue as well as more economic activity - upon which taxation itself depends. Nevertheless, a 36% Stamp Duty cut would only reduce the Stamp Duty Savings Ratio down to 8.7 years in London and to 2.1 years in England. Clearly this is still too high.
The Treasury Should Consider a Minimum 36% Cut & Shifting the Onus to The Vendor.
Our recommendation is to enact at least a 36% Stamp Duty cut across the board and shift the liability for Stamp Duty from the Buyer to the Vendor. This would have the following benefits:
Total tax and business revenues are likely to rise beyond what we have modelled above as we would expect an even larger turnover of transactions than 1.43m p/a.
The savings barrier to property transactions identified above would be removed.
Upsizing would be encouraged as the tax bill on selling a lower valued property would be less than that which would otherwise be paid on a buying a more expensive property. In turn this would undoubtedly create conditions for a more liquid, functioning market.
The current Stamp Duty Exemption for First Time Buyers would become redundant, saving the Treasury £700m.
Significantly higher transactions will encourage a greater utilisation of the existing housing stock, the conversion of tired stock to modernised rental units by Investors and new housing starts by Developers. In the context of a housing crisis this has to be welcomed.
By shifting the onus to the Vendor the tax liability is payable when the homeowner is more likely to have the Funds to pay the tax.
Some thought however will need to be given to a taper relief system whereby those that have bought and paid hefty Stamp Duty bills in say the last 7 years are provided with some element of Stamp Duty Relief.
Lastly it is imperative that the 36% cut is applied to ALL the existing Stamp Duty rates (ie across the board). Without this property chains will remain 'gummed-up' as many Vendor's will simply choose to avoid the tax by not selling their property.
If Mr Johnson is bold enough to cut Stamp Duty by at least 36% and switch the liability to the Vendor we are confident that our estimate of a £9.8bn boost to business and tax revenues would be surpassed, potentially transforming the broken property market, ‘un-gumming’ property chains at the top-end and leading to greater liquidity throughout the market. In turn this will create greater utilisation of the existing housing stock and encourage the conversion of tired stock to modernised rental units by Investors and new housing starts by Developers. Moreover in the context of 13 revisions to Stamp Duty since 1997 and transactions in the doldrums it is safe to say the system has failed and it is time for a new approach. Following Mr Johnson’s election as Prime Minister we hope he has the courage to grasp the nettle and overhaul the dysfunctional system once and for all.
With every best wish.
Ludgrove Property Ltd Tel: +44 (0)207 889 2860
Biography: Fraser Slater is the CEO and Founder of Ludgrove Property. Prior to Ludgrove Fraser spent 20 years in The City. In the course of his career he was a Real Estate Analyst, the Fund Manager of a £6bn Equity portfolio for USS Ltd and the Founder and CEO of WDB Capital, a London based Fund Management business. In 2008 WDB Capital outperformed its peer group by +52% making Fraser's portfolio one of Europe's best performing Funds during the Financial Crisis. In the same year his Fund was nominated New Fund of the Year by EuroHedge. After leaving The City, Fraser started Ludgrove with an ambition to be Prime London's leading Property Buying agency with an emphasis on original research and delivering a highly value-added service to clients.
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