Stamp Duty Abolished

Well, probably not

Like the UK housing market, this house is looking a little shaky.

In a bid to restart the flagging UK housing market Alistair Darling, the chancellor, is considering abolishing stamp duty.

At least that's what a number of newspapers reported yesterday, The Sun broke the story.

Or as a cheaper alternative, for the government, he may allow people to defer paying stamp duty when they buy a house for a few years.

Two questions come to mind.

1. Is it likely that the chancellor would scrap stamp duty, perhaps just temporarily?
2. If he does amend stamp duty will it actually make any difference to the property market?

1: Can the chancellor afford it?

In the last 10 years, stamp duty has raised £31.5 billion for the chancellor. Last year it raised about £6.5 billion. That's a lot of tax for the chancellor to lose. But this year it's likely to raise considerably less for him.

The reason for the lower tax take this year is a combination of falling house prices and far fewer properties being sold. So if Alistair Darling did decide to abolish stamp duty, it's unlikely to cost him anywhere near the £6.5 billion it generated last year.

However this would still be a very expensive give away and with tax receipts in general falling, the government's piggy bank is nearly empty.

To put this into perspective, the “10 pence tax” U turn, earlier this year, will cost the chancellor an estimated £2.7 billion, although the government's figures are a little vague on the subject. The abolition of stamp duty would almost certainly cost more.

The answer then is probably: No, the chancellor can't afford to abolish stamp duty. It would be just too expensive. As an alternative he might be able to afford to allow people to defer their stamp duty payments. But even that might require fudging the figures, given the huge government budget deficit.

2: Would it make any difference?

As a large UK retailer would put it “Every little helps”. Unfortunately, for people looking to buy an average house, which according to a Nationwide press release was worth £169,316 last month (July 2008), it will only be a little, just 1%.

In the same press release, Nationwide said that house prices fell by 1.7% last month compared to the previous month, June 2008. Given that house prices are falling so rapidly, abolishing stamp duty would be a modest give away and it would probably be of little consequence to average and first time buyers.

While a reduction in costs for home buyers would be welcome, abolishing, deferring or reducing stamp duty would fail to deal with the fundamental issues. The main problems are the lack of mortgages and falling prices.

Until mortgage availability improves and houses prices stabilise, changes to stamp duty would appear to be a case of rearranging the deck chairs on the Titanic.