By Harry Fone, grassroots campaign manager at the TaxPayers’ Alliance
Purchasing a home is stressful at the best of times, for a multitude of reasons. One of which is finding the money to pay Stamp Duty Land Tax (SDLT). To many it seems ludicrous that you have to pay a tax just for buying a residential property. Often it’s not a paltry sum of money either. A purchase price of £500,000 will mean buyers have to fork out £15,000 (there are concessions for first time buyers though).
The problem with stamp duty is that it reduces buyers’ willingness to purchase a property. So it was no surprise that the housing market went gangbusters when the government introduced a temporary lift in the threshold to £500,000 during the pandemic. Many people from across the political spectrum want to see SDLT cut or abolished, due to the economic harm and distortions that it causes.
The think tank Onward believes it has a new solution. As part of a research paper titled “Going green - New technologies and behaviour change for net zero”, they propose that buyers should receive a rebate of up to 50 per cent on their stamp duty bill if they install “energy-efficiency measures and heat pumps” within 24 months of moving into a new property. They believe that the combination of a tax cut and a possible increase in property value “would provide an attractive financial incentive” to install a heat pump.
An interesting idea. But like many tax policy gimmicks, it’s too clever by half. Given that research by the TaxPayers’ Alliance estimates the full cost of an air source heat pump at up to £18,000, buyers would need to make a hefty stamp duty saving to make it worth their while. Onward’s report says the “average retrofit cost” is £8,110 but acknowledges:
“The cost for a household wishing to perform a deep retrofit and install a heat pump at the same time would be higher, and could rise up to £20,000.”
With this in mind, some worked examples seem to suggest that even those at the higher end of the housing market won’t see any benefit from Onward’s proposals. For example, looking at stamp duty rates and house prices in England (Wales and Scotland have different rates on property purchases):
Example 1: The average house price in England using ONS figures from June 2022 is nearly £305,000. A first time buyer will pay £250 in stamp duty. Someone who is not a first time buyer would pay £5,250. So their rebates based on Onward’s proposal would be £125 and £2,625 respectively. Even with a retrofit cost at the lower figure of £8,110 it would be cheaper just to pay the whole stamp duty bill.
Example 2: In regions where house prices are lower, such as the North East, where the average is just shy of £158,000 there’s even less financial incentive. First time buyers wouldn’t pay any duty at all and those moving home would only pay £660. Once again there’s no financial incentive.
Example 3: What about somewhere more affluent like London where the average property price is £537,920. When the price is over £500,000, a first time home buyer pays the same stamp duty as someone moving home. The total stamp duty bill would be £16,896 meaning a 50 per cent rebate would be £8,448. If the retrofit cost were £8,110, the total bill would be £16,558, so there would be a net financial gain, albeit just £338. If a buyer opted for “a deep retrofit” of up to £20,000 then the incentive quickly evaporates. It’s also worth considering that a lot of flats in London sell for well over £500,000 - installing a heat pump may not even be possible in a lot of cases and not just in the capital.
Example 4: You start to get the picture that those at the higher end of the market will have the most financial incentive. Onward has considered this and the rebate will be capped at £12,500 - so only those with a stamp duty bill of £25,000 or higher will get the maximum benefit. Those purchasing properties of £700,000 (that’s 2.3 times the England average) will pay duty of £25,000. But even then these wealthier buyers may not be incentivised enough to install energy efficiency measures. It makes sense if the cost of a retrofit is £8,110 as the buyer would save £4,390. As soon as the retrofit cost exceeds £12,500 - and remember, these are likely to be much larger properties with higher retrofit costs - then any financial incentive is nullified.
It seems this policy alone won’t encourage home buyers to invest in energy efficiencies and heat pumps. In a lot of cases there just isn’t enough financial reward, unless the cost of heat pumps falls dramatically. But in the meantime, it would further complicate the tax system to the benefit of wealthy homeowners.
And what should be done about stamp duty itself? Well as the TaxPayers’ Alliance has suggested, why not simply raise the SDLT threshold to £1 million, so that only millionaires pay. Our research from 2019 estimated that:
“Raising the SDLT threshold from £125,000 to £1 million would result in an estimated 220,000 more transactions over the coming year, equivalent to a 31 per cent increase.”
Not only would this be far easier to implement, but it would offer a serious financial incentive to millions of home buyers. It would offer them a simple tax saving, which they could choose to use for affordable energy efficiency measures if they wished.
Attempting to dictate people’s behaviour with complex tax gimmicks always creates loopholes, which often benefit the already well off. That’s what this proposal from Onward seems to do. Complicating the tax system further with eco-wheezes, no matter how well intentioned, is not the answer on stamp duty.