Stamp duty has long been a controversial tax. Critics highlight the role of the tax in stifling housing market activity and the seemingly arbitrary penalty it applies to properties that change hands more frequently, while advocates point to the tax’s progressive structure and its role in deterring speculation in the housing market. Since July 2020, a stamp duty holiday has been in place, which is scheduled to come to an end on 31st March 2021. The policy’s apparent success so far in reigniting the housing market has caused many to question the wisdom of terminating the stamp duty holiday so early on in the UK’s economic recovery.
Central to this debate are the conflicting objectives of rebuilding the economy following the devastating impacts of the COVID-19 pandemic while also keeping the public finances under control. The fiscal implications of stamp duty are highly complex, given the interlinkages that exist between the UK housing market and the wider economy.
This report presents a comprehensive analysis of the fiscal impacts of making the current stamp duty holiday permanent, drawing from a wealth of academic literature and government data. The key findings are:
• Extending the stamp duty holiday would be close to fiscally neutral, with the new tax revenues generated by higher consumption and housing market activity compensating for between 78% and 86% of the original loss of stamp duty income.
• Holding property prices and transaction numbers constant, extending the stamp duty holiday would lead to a £4.0 billion decline in revenues from Stamp Duty Land Tax (SDLT), Land and Buildings Transactions Tax (LBTT) and Land Transactions Tax (LTT).
• However, our analysis shows that the reduction in the rate of stamp duty would lead to 37,000 additional property transactions taking place each year, generating £266 million in revenues annually.
• If the stamp duty holiday were to be made permanent, HMRC’s derived elasticities suggest that future UK house prices would be on average 1.7% higher than they otherwise would have been. These higher property values would have a positive effect on SDLT, LBTT and LTT receipts, leading to £256 billion in additional revenues each year.
• Our analysis further shows that the 1.7% increase in house prices would lead to an estimated 0.26% increase in household consumption. This additional economic activity would generate estimated tax revenues of £2.2 billion per year.
• Making the stamp duty holiday permanent would reduce UK households’ collective stamp duty burden by £3.4 billion each year. In our lower-bound estimate, we assume that this will stimulate £1.0 billion of consumption, generating £384 million in tax revenues each year. In our upper-bound estimate, aggregate consumption rises by £2.0 billion per year, leading to a £735 million increase in tax revenues.