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Stamp duty land tax, the tax paid on the purchase of a property, is among our worst and most damaging taxes.

So, to nobody’s great surprise, Jeremy Hunt has said that he’d like to cut taxes in his March budget. And perhaps cut them again in another fiscal event that he is threatening to squeeze in before the election.

I have to start with a little throat-clearing. Even if the Office for Budget Responsibility does present him with marginally better forecasts of the fiscal situation, he will still be barely on track to meet his own, convoluted, target that debt should be falling in the fifth year of the forecast. And then only because he is pencilling in five years of spending cuts for most public services. I’m willing to bet that any money spent on tax cuts between now and the election is recouped in tax increases announced pretty soon after, whoever wins.

However, I want to engage more constructively. If he does want to cut taxes, which should he cut, especially if, as he says, he wants to prioritise economic growth?

Regular readers won’t be surprised to hear that top of my list would be a cut in stamp duty land tax, the tax paid on the purchase of a property. Against stiff competition, it is among our worst and most damaging taxes; it gums up the housing market, keeps people who don’t need them in houses that are too big for them, thus reducing the supply available to growing families; and it serves to reduce labour mobility. You could abolish it entirely for residential properties at a cost of about £9 billion next year. Around half that sum would pay to get rid of it for owners’ primary residences only.

One reason that I doubt the chancellor will take this path is that more than a third of those revenues are raised on purchases of properties worth more than £1 million. That’s partly because of the eye-wateringly high rates on more expensive properties — 10 per cent on values over £925,000 and 12 per cent over £1.5 million in England and Northern Ireland. It would be a giveaway to existing owners of valuable properties, just as increases through the 2010s hit this group. Yet the effect of high rates on expensive properties is felt all the way down the housing ladder as transactions, and hence effective supply, are reduced.

Of course, there is an easy way to offset that distributional impact. Council tax on valuable properties ought to be increased, and increased by a lot. That would make for a much fairer and more growth-friendly system of housing tax.

Note what an extraordinary amount of stamp duty is paid not on owners’ primary residences but through the higher rate payable on additional properties — about half the total. An additional 3 per cent is payable over and above the standard rates. It’s an additional 6 per cent in Scotland. Again, politically, cutting these rates won’t look attractive, landlords generally are not top of the list when looking for popular tax cuts, but, again, we need to look harder at the actual impact of these taxes. They limit the number of properties available for rent. They therefore raise the prices faced by renters. The taxation of rental housing more generally has become increasingly penal.

Not only do prospective landlords have to pay extra stamp duty, they pay far more tax on other aspects of their investment than do owner-occupiers. They pay tax on rental income received, with now only limited tax relief on mortgage payments. A higher-rate taxpayer whose rent receipts only just offset their mortgage interest payments will still pay tax of 20 per cent on their rental income. Landlords also pay capital gains tax on the sale of the property, including on purely inflationary gains. Even ignoring stamp duty, the effective tax rate on the real return received by a higher-rate taxpayer buying a property to let, with a 50 per cent mortgage and selling after ten years is something like 76 per cent. That rises to 86 per cent for additional (45 per cent) rate taxpayers and can easily exceed 100 per cent for landlords with bigger mortgages.

To repeat, it is tenants, actual and potential, who suffer. The more harshly that landlords are taxed, the higher rents will be. One of the reasons that private rents have risen so much is that government policy has substantially increased tax payable by private landlords. Even more than the price of owner-occupation, high rents in and around London and other thriving cities prevent young people moving from elsewhere to take up well-paid, highly productive jobs.

It also true that there is little reason to believe that the supply of new housing would adjust to any plausible change to the taxes I’m discussing here. Hence tax changes that increase the supply of rental housing will likely reduce the supply for owner-occupation. However, even if you believe there is a case for subsidising owner-occupation relative to renting, this surely is not the way to do it. The big losers from the present system, other than the economy, are private renters who can’t get on the housing ladder.

It’s not hard to make the system better. Reduce the stamp duty surcharge (ideally, abolish it), end the restrictions on mortgage relief and reform capital gains tax so that it is charged only on any real increase in value. Do all that, not forgetting abolishing stamp duty on primary residences and raising council tax on more expensive properties, and you won’t fix the housing market — that will need a lot more reform, not least of the planning system — but at least you’ll be taking some steps in the right direction. If the chancellor is looking for tax cuts, these are some ideas that he should be considering. Who knows? Maybe the OBR would even forecast a small increase in economic growth as a result.

This article was first published in The Times, and is reproduced here with kind permission.

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