Counting The Real Cost Of Stamp Duty: The strange case of London’s vanishing mid-market.

There’s obviously nothing unusual about a £1 million house in London. One in five homes now sells for at least that price.

Most of these transactions fall into the sub £3m bracket: the median price for all £1m+ sales in London last year was ‘just’ £1.45m. At this level, liquidity remains strong. If that’s your budget and you’re looking in Clapham, Wandsworth, Hackney or Victoria Park, you’re unlikely to be short of options.

But the picture looks very different if you want to take the next step up. Buyers with, for instance, £5m to £15m to invest in prime central London will find there’s a real dearth of stock, especially if they want a house that’s fully modernised and furbished to a high standard. What is available almost always seems to be a forced sale because of one of the three D’s: death, divorce or downsizing through need.

This is a big change from the situation 10 years ago. There was never a glut exactly, but supply was much more plentiful. What’s caused the shrinkage?

Thanks, George

On 3rd December 2014, George Osborne rose to give his Autumn Statement. As reports at the time said, he “pulled a big rabbit out of a small hat”.

Literally overnight, Stamp Duty Land Tax (SDLT) was radically reformed. Instead of the old ‘slab’ system (where the property’s entire cost attracted SDLT at a single rate, depending on which of five chargeable bands it fell into), Stamp Duty would henceforth be charged on a progressive basis.

The objectives were clear. First, to avoid the cliff edges that existed at price points like £125,000 or £250,000. Second, to dampen demand at the top end of the market. As recently as 2010, the top rate of SDLT had been just 4%. In 2012, it increased to 7% on properties over £2m. Now, with a wave of the wand, it became 12% on every pound spent over £1.5m.

Beware the Law of Unintended Consequences

Things don’t always work out as planned. Particularly in London, Osborne’s reform has done less to limit demand than to restrict supply. For instance, our research illustrates that in the mid-market sections of Prime Central London, the supply of houses has dropped since 2014 (the highwater mark) by anywhere between 25% and 45% depending on the year.

Even more than other asset classes, the residential property market is driven by sentiment. Whether they’re upsizing or downsizing, many owners of more expensive homes now feel it’s simply too costly to move within London.

Say you’re thinking of selling a £5m house and buying one for £10m. You don’t just need to finance the gap between those two figures. You’ll also have to stump up at least £1,111,250 in SDLT…and considerably more if it’s a second home and/or you’re a non-UK resident. What that means in practice is that Stamp Duty raises the cost of a £5m upgrade by anywhere between 22% and 32%.

Things are just as bad if you’re looking to downsize. Imagine you own a £10m house and want to acquire one for £5m. You might have made a substantial gain on your current home; perhaps you were fortunate enough to buy a large communal garden property in Notting Hill twenty years ago. But a big hole is going to be knocked in the proceeds by the minimum of £511,250 you’ll pay in SDLT on your new purchase (not to mention your exposure to Capital Gains Tax on the sale if your first home is elsewhere). That’s a huge disincentive to move, particularly if owners are asset rich but cash poor.

An unequal impact

High prices overall make Stamp Duty a particular issue in London. It’s a source of grievance for every buyer, but most just grit their teeth and accept the pain. That’s even true of those buying super-prime properties and therefore paying the highest marginal rate (SDLT on a £25m property is at least £2.9m and could be over £4m).

Where the tax does cause a major problem is in Prime Central London. Many of these owners are simply not moving, largely because Stamp Duty puts them in double jeopardy. First, if they bought in the last 10 years, their house won’t have appreciated much in value: prices in this range are pretty much stuck at 2012 levels, with SDLT being one of the main causes. Second, they need to cover the cost of Stamp Duty on their new property. Add both together, and the result is that the few who do take the plunge are often asking unrealistic prices.

Another factor bearing down on this part of the market is the spike in build and refurb costs since 2021. Prices have risen by at least 60%. Owners rarely consider the cost of renovations when setting an asking price, but it’s a hot topic for buyers. Very often, the result is an unbridgeable gulf in expectations. However appealing the location, owners of unmodernised houses are finding it increasingly hard to get the offers they want.

Sizing the SDLT issue in London

Stamp Duty is a consequential revenue source for the government. £11.7 billion was raised from residential SDLT in 2022/23, an increase of 15% over the previous year.

Across England and Northern Ireland, purchases of properties valued at £1m or more represented 4% of the volume – approximately 40,000 transactions - but accounted for half of total SDLT receipts. Inevitably, a large proportion of this money came from the capital.

Treasury figures show that 8 of the 10 local authorities with the highest receipts were in London, with Buckinghamshire and Elmbridge being the only exceptions. In the local authority area of Westminster alone (which includes Mayfair, Belgravia and Marylebone), SDLT cost buyers £765 million; money, of course, on which most would already have paid income tax.

That’s a huge amount of friction for any market to absorb.

Tackling the problem

SDLT is often labelled the worst tax in Britain, principally because it gums up the market and restricts mobility. Nowhere is this truer than in Prime Central London. So what’s to be done?

Some have suggested lowering rates for those wishing to downsize, but that’s a concept that seems unlikely to fly. What’s really required is a wholesale review of property taxes that tackles SDLT and council tax simultaneously.

The latter relies on outdated valuations from 30 years ago. Moreover, it fails to link what’s charged to the value of the property. As MP Simon Fell pointed out in Parliament last year: “Here in Westminster, a £30 million mansion pays £1,828 in council tax, while a family in a modest band D home in my constituency of Barrow and Furness pays £2,068. How in the world can that be fair?” Natural justice suggests that inconsistencies like this need to be tackled. Doing so would also create the fiscal headroom to address the underlying problems with SDLT.

Clearly, this is a big nettle for any government to grasp. Would Labour consider it? It’s not inconceivable; after all, a mansion tax was one of their pledges going into the 2015 general election.

Opening doors that seem closed

While recent analyses suggest things might be freeing up a little, the supply of houses in Prime Central London remains desperately tight. In the past 12 months, there were fewer than 250 transactions in this price range – a small number when you factor in the new build market and flat sales.

When supply is this short, buyers need expert help. We’ve helped clients overcome the challenge in multiple ways: unearthing unexpected opportunities, either through contacts going back over forty years or by identifying the right sort of property that we have seen historically; defining the real value in an environment where prices can be wildly inflated; advising on the likely cost of renovations; and helping negotiate the best deal possible always with our clients’ best interest at heart.