By Philip Syvret
NEVER trust a politician who promises that a tax will be temporary. Did you know that stamp duty was first introduced in England in 1694 to help fund the war with France? It was said to be a temporary measure. But, if you’ll pardon the pun, somehow it stuck.
Such was the ease of collection and the level of revenue recovered from stamp duty that, over the years, it came to be applied to items as diverse as playing cards and printed publications. Some may even remember that in the middle of the last century there was a stamp duty on a cheque.
There remain in Jersey’s tax rules some relics of the tax man’s fondness for stamp duty, but most are now relatively low-cost duties. Not so, however, in respect of property transactions. In recent decades the Treasury has seen the taxation of property buyers as a nice little earner and the duties payable have become ever-more prominent and expensive.
I say ‘little’ earner, but that rather depends on your perspective. The median price of a three-bedroom house in Jersey last year was £866,000. To purchase that you’d have to pay the tax man a shade under £20,000 in duty. Want a median-priced four-bed house and your tax is £38,000. As a consequence, stamp duty on property transactions in Jersey during 2021 brought in the immodest sum of £62 million.
On the face of it stamp duty is an easy win for the Treasury and their political masters. They like a duty which taxes those for whom many of the public hold only a modicum of sympathy. If you can afford to buy a house at £866,000, let alone buy a second house to let out, then you’re fair game.
It seems that it was this mindset that led to the introduction, a few months ago, of a surcharge of an additional 3% above the standard rate on people buying an additional home to let out. On the £866,000 three-bedroom home, a prospective landlord has to pay a whopping £45,880 in tax in order to provide a rental home for a family to occupy.
If you think that’s bad, some of our States Members voted for the surcharge to be 10%. Ironically the report presented to the States said that the 10% surcharge would be temporary until the present housing crisis had passed – where have we heard that before?
The rationale for this punitive surcharge was that prospective landlords were outbidding first-time buyers and mopping up a large share of the already limited supply of homes. This was based on what was described as ‘anecdotal evidence’ in the report to the States. The projet candidly acknowledged that government had almost no data to underwrite the rationale. Hardly a valid basis for such a significant new tax.
As a lawyer I dislike propositions which are not based upon evidence. Given the failure of government to produce Jersey data, we must look across the water for a steer.
In 2016 George Osborne, then Chancellor of the Exchequer, introduced a similar 3% surcharge for buy-to-let properties. Hamptons, an agency respected for its detailed analysis of the UK market, reported that the proportion of first-time buyers coming up against an investor when bidding on a property was just 19% in 2020 – in effect only a one-in-five chance that a first-time buyer could be edged out by an investor.
Was this a result of investors being disincentivised by the surcharge? In the absence of evidence, we cannot be sure. One thing is certain – policy on the hoof supported by anecdotal evidence is unsatisfactory, particularly where that policy carries risk.
And the risks of increasing the costs of buy-to-let investments are clear. The higher the cost of acquisition, the higher the return has to be. The additional costs will therefore have a direct inflationary effect on rental rates. Equally, fewer investor buyers means fewer rental properties available. Unless Andium Homes and the Island’s housing trusts can build so quickly that they can meet the extra demand, less supply with demand remaining constant will again contribute to higher rental prices. With an economy already reeling from high rents, those risks seem to me to have been too great for a policy to have been set upon merely ‘anecdotal evidence’.
In turn, often property purchases are part of a chain of transactions, many with an investor purchaser somewhere in the mix. Reduce investor activity and those chains miss a link. Property transactions will therefore stall to the detriment of all, including the revenue takers.
If the intent of the surcharge was to help first-time buyers, then there were clear alternatives. Let’s consider a few.
The surcharge is intended to create a difference in cost to purchase between first-time buyers and investors. The investor has to pay more to buy, so the theory is that he will run out of steam in a bidding situation earlier that the first-time buyer.
That advantage to the first-time buyer can, however, be created by reducing (or dare I say abolishing altogether) the stamp duty payable by a first-time buyer. Youngsters would not need to raise the stamp duty costs through savings or borrowing, but a material difference in the purchase cost between them and investors will be maintained.
Such a solution would have been common sense where first-time buyers are being pushed away from purchases because of inflated prices already built into the market and the recent hikes in mortgage rates. First-time buyers are more likely to be near the credit limit and unable to extend borrowing to cover stamp duty. Reducing the cost of stamp duty for those buyers would have been the better way forward. I have a fear that the tendency to wallop tax on the wealthier (for whom public sympathy would have been limited) might have clouded the judgment of our policy makers here.
Presently, even if you are a first-time buyer, on a purchase of a property valued at more than £500,000 you will not benefit from a reduced rate of stamp duty. In a market where median priced three-bed houses are £866,000, that £500,000 threshold is unrealistic. It means that full stamp duty is in fact paid by many first-time buyers.
Tragically, those saving hard for their deposit have not only seen house prices race away from them in recent years, but also those prices exceeding the threshold for a lower stamp duty, meaning that more money has to be found to purchase.
It is beyond time that the threshold for the reduced stamp duty rate for first-time buyers is adjusted to a meaningful figure. Further, that figure should be pegged to the House Price Index going forward so it does not fall out of kilter with the market in the future.
The downside of these alternatives, the bean counters would say, is a loss of revenue to the Treasury. If we are determined to find a fix to the housing crisis (and we must), then that measurable loss in revenue can be addressed by savings in expenditure. The failure by government to meet its own targets for savings reported in recent weeks, and the shocking dissembling approach to the reported savings that went with that, is a matter which needs to be addressed.
In turn we should perhaps consider why we have stamp duty at all? It clogs the property system, forcing people to stay in property, whether rented or owned, which they may not want. The inflexible slab structure of different rates for different-value properties creates irrational inequalities. Freeing the property market of these impositions would create a better turnover of property which in turn would produce other taxable economic activity.
In the 21st century, faced with our own peculiar housing crisis, it is time perhaps for a radical rethink rather than clinging to a ‘temporary’ system created in 1694.
Philip Syvret, a solicitor with Benest & Syvret, has advised on many of the Island’s largest residential property developments and is a regular commentator on housing policy.