UK stamp duty cut will benefit wealthier and raise inflation, say experts

Cuts to stamp duty will hurt first-time buyers and stoke an inflationary bubble in the property market as house prices rise at the fastest rate for almost 20 years, the government has been warned.

In the latest report detailing the tax cuts favoured by the prime minister, Liz Truss, the Times said Kwasi Kwarteng, the chancellor, was preparing to launch radical cuts to stamp duty as the “rabbit out of the hat” measure in his mini-budget to the House of Commons on Friday.

However, economists and property experts said measures to further stoke an already red-hot housing market would benefit wealthier individuals most and risk pricing-out first-time buyers.

It comes less than a year after the expiry of a stamp duty cut used by former chancellor Rishi Sunak during the Covid pandemic, which analysts said mainly benefited London and the south-east and had little impact elsewhere across the UK.

“It’s bovine short-termism at its worst,” said Lewis Shaw, the founder of Mansfield-based Shaw Financial Services. “This move will push house prices even higher, worsening inflation and further pricing first-time buyers out of homeownership.

“If someone asked me how to drive an already overheated property market into dangerous bubble territory and make things worse for everyone, this policy would be it.”

Stamp duty is paid by buyers of land or property in England and Northern Ireland, with higher rates above certain thresholds. Separate land taxes apply in Scotland and Wales.

The reports of a potential cut sent shares in Britain’s housebuilders rising on the London stock market on Wednesday morning, with gains of between 3% and 6% for the FTSE 100 firms Barratt, Persimmon, Taylor Wimpey and Berkeley – among the top performers on the blue-chip index.

UK average house prices increased by 15.5% in the year to July, the highest annual inflation rate since May 2003, according to official figures.

Many economists regard stamp duty as a “bad tax” because it discourages mobility, as it is paid by homebuyers rather than sellers. Several experts have called for sweeping changes to the way property is taxed, including changes to the council tax system.

Cutting stamp duty could help offset a potential slowdown in the housing market as the Bank of England raises interest rates, with the cost of borrowing expected to hit 4.5% next year, adding to the financial squeeze on homebuyers.

However, analysts warned that without wider reforms, as well as efforts to boost housing supply, the measure would add to inflation while doing little to benefit those struggling to get on the housing ladder.

“As borrowing gets more expensive, the market was already looking like it would shift towards higher-income, wealthier borrowers and away from first-time buyers,” said Neal Hudson, a property market analyst. “Changes to stamp duty could accelerate this by further reducing the cost of buying for investors [and] second home buyers.”

Cutting the levy would also come with a hefty price tag, at a time when the government is preparing to launch billions of pounds in tax cuts on business profits, national insurance and freezing energy prices. Across the UK, property transaction taxes bring in more than £15bn a year for the exchequer.

Truss has argued that getting the economy moving is her primary focus, over and above the immediate impact of her policy measures for the rich or poor.

Measures to stimulate the housing market could spur wider economic activity by fuelling demand for related goods and services such as estate agents, solicitors, removals, the building trade, furniture and white goods.

However, experts said launching a fresh tax break soon after Sunak’s stamp duty holiday would limit its impact. Alongside the rush to relocate for more space that occurred during the Covid pandemic, the stamp duty holiday spurred a 43% rise in property transactions last year.

A report from the Organisation for Economic Co-operation and Development this summer found that UK property taxes were outdated and favour a wealthy elite. It warned that efforts to spur economic growth by cutting levies on property transactions were propping up sky-high prices.

Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, said: “The only reason these holidays work is because people feel they have a small window of opportunity to take advantage, otherwise they’ll miss out. The point at which they think they can just wait for the next one, they will start to become less effective.

“Even if it does stimulate demand, it overlooks the fact that the real brake on the property market is a severe shortage of supply.”