Property Tax, Stamp Duty and house prices

The most common objection to abolishing Stamp Duty is that it does not help buyers at all: in a market constrained by supply, the saving is captured by sellers through higher prices, so abolition becomes a transfer to existing owners. The objection is correct as far as it goes, but it describes the abolition of Stamp Duty on its own. The Prosperity 2030 programme does not abolish Stamp Duty in isolation. It replaces it with a recurring annual tax on the value of the property, and that changes the incidence entirely. This appendix sets out the objection in its strongest form, explains the capitalisation mechanics that answer it, and works the numbers through on a representative home.

The objection as commonly presented

Stamp Duty is widely judged one of the most economically damaging taxes in the system, and the case against it is well established. Because the supply of housing is inelastic in the short run, the economic incidence of a transaction tax falls largely on the seller rather than the buyer. The clearest evidence is Australian: Davidoff and Leigh (2013) find that the full incidence of stamp duty changes falls on prices, so a higher duty lowers the price the seller receives by roughly the amount of the tax. The mirror image is that cutting the tax tends to raise prices. United Kingdom evidence from the 2008 to 2009 stamp duty holiday points the same way: Besley, Meads and Surico (2014) find that a substantial share of the temporary cut was capitalised into higher prices rather than retained by buyers.

The same pattern undermines reliefs aimed at first-time buyers. HM Revenue and Customs' own evaluation of the 2010 to 2012 first-time buyer relief concluded that it had no significant effect on affordability and that most of its value fed through into higher prices, a finding the Office for Budget Responsibility later repeated. The Institute for Government summarises the consensus plainly: most economists regard sellers, not buyers, as the principal beneficiaries of a Stamp Duty cut.

This is why simply abolishing Stamp Duty would, on the evidence, hand much of the gain to those who already own. The Mirrlees Review reached exactly this conclusion in 2011, recommending that Stamp Duty be abolished but warning against giving up the revenue or handing windfall gains to current owners, and so proposing replacement with a recurring tax proportional to up-to-date property values rather than abolition alone. The objection, in short, is an objection to abolition in isolation. It is not an objection to the reform proposed here.

Why replacement is not abolition

The Prosperity 2030 reform removes Stamp Duty and, in the same step, introduces a recurring tax of 1% on the value of the property. The two are phased over the same three years. The incidence argument that makes abolition-in-isolation a windfall for sellers does not survive the substitution, because a recurring holding tax acts on prices in the opposite direction to a transaction tax. The correct comparison is therefore not a one-off cut against nothing, but one recurring stream against another.

How capitalisation works

A recurring tax attached to an asset is capitalised into the price of that asset. A rational buyer will pay less for a property that carries an annual liability than for one that does not, by the present value of the liability they expect to bear. This is one of the oldest established results in public finance, demonstrated empirically by Oates (1969), and it is the same mechanism that makes the seller bear the incidence of a transaction tax.

Two points follow, and both matter for measuring the price effect correctly.

First, the right horizon is infinite, not the length of one owner's stay. The liability does not expire when the current owner sells; it passes with the property. The price a buyer can expect on resale is itself reduced by the tax the next owner will face, and so on down the chain, so the entire future stream is priced into the value today. An individual's expected tenure determines how much tax that person pays, but not how much is capitalised into the price they pay to acquire the asset.

Second, the comparison must be like for like. Stamp Duty is also capitalised, because it recurs every time the property changes hands. Comparing a single Stamp Duty payment against a perpetual Property Tax overstates the effect. The honest comparison sets the perpetual stream of the new tax against the perpetual stream of the Stamp Duty it replaces, with the latter falling due at each sale.

On that basis the recurring Property Tax capitalises a larger negative into the price than the Stamp Duty it removes, so the net effect on prices is downward, not upward. The reform cannot be a handout to sellers. If anything it transfers value towards buyers and movers. The direction is unambiguous; the magnitude depends on the discount rate and on the degree of capitalisation, which in practice is partial rather than full, and is further softened where owners take up deferral.

Worked example: a £500,000 home

Take a £500,000 home, the value of a typical family house in London or the South East. Under the 2025/26 Stamp Duty rates a standard buyer pays £15,000 once, at purchase. Under the reform they pay 1% of value, £5,000 a year. Because the Property Tax replaces Council Tax, which on a home of this value runs at about £1,750 a year, the net new charge is £3,250 a year.

Effect on price

Capitalising both taxes as the perpetual streams they are, and assuming the home changes hands about every ten years, at a real discount rate of 3% to 5%:

Removing a recurring Stamp Duty worth £39,000 to £59,000 in present value, and replacing it with a recurring Property Tax worth £65,000 to £108,000, leaves a net downward pressure on price of roughly £25,000 to £50,000.

Effect on the individual owner

Length of tenure answers a different question: what one owner pays between moves. The relevant figure is how long owners actually hold before selling, around nine to ten years, not the roughly twenty-one-year average tenure of the standing stock, which is inflated by owners who never move. Over a normal hold the recurring tax costs the owner more than Stamp Duty did:

This is the intended trade-off, not a flaw. The burden moves off the act of moving and onto length of tenure: away from frequent movers and from first-time buyers at the threshold, and towards long-settled owners, who hold disproportionately more of the appreciating and under-occupied stock.

Set against the Stamp Duty no longer paid

Amortising the £15,000 of Stamp Duty over a ten-year hold gives about £1,850 a year. The annual position for that owner is therefore the £5,000 Property Tax, less £1,750 of Council Tax replaced, less £1,850 of amortised Stamp Duty, a net additional cost of about £1,400 a year. This sits close to the £1,200 national average increase quoted in the main text, which is the expected result once the headline charge is set against everything it replaces.

All figures are illustrative, use 2025/26 Stamp Duty rates and a central real discount rate of 4%, and ignore deferral, which would reduce the effective cost further for any owner who elects it.

No Property Tax for recent buyers during the switchover

The worked example treats Stamp Duty already paid as amortised over the hold, and for most owners that is the right way to see it. It understates one group only: those who paid Stamp Duty just before the Property Tax begins, who meet the full one-off charge under the old system and the new recurring charge almost immediately, with no interval for the first to amortise before the second arrives. This is a question of timing rather than of the tax base, and the programme answers it in the simplest way available. Any owner-occupier who has paid Stamp Duty on their principal residence within the previous two years pays no Property Tax while the new tax is phasing in, and joins it at the full rate along with everyone else once the phase-in is complete. The measure is restricted to principal residences, on the same basis as deferral, so buy-to-let and second homes are excluded and the obvious gaming route is closed.

The exemption has no bearing on the price argument above. It does not alter the base, the 1% rate, or the incidence of the recurring charge. It removes, for a defined transitional cohort, the coincidence of paying the old transaction tax and the new recurring tax within the same transition window, and nothing more. Because it is a straightforward exemption rather than a calculated offset, there is no rate, cap, or carry-over to define: an eligible household simply pays nothing under the new tax until the phase-in ends. The declining CT charge remains. It also removes any reason to postpone a purchase merely to avoid the onset of the new tax during the switchover, since a recent buyer is held harmless from it, which supports transaction volumes through the transition.

The cost is bounded and one-off. Restricted to owner-occupiers, the recent-buyer cohort would otherwise have paid Property Tax of about £2 billion in the first phase-in year and £4 billion in the second, so the exemption costs on the order of £6 billion in all, and nothing once the tax reaches its full rate. It falls entirely in the two years when Council Tax is still being collected alongside the new tax, leaving net Property Tax over Council Tax at about £8 billion and £15 billion in those years, so it is absorbed within the transition without drawing on the fiscal space the programme commits elsewhere.

The programme's housing reforms reinforce the direction

The worked example isolates the tax swap, but it does not stand alone. Three further reforms act on the same prices, and all push in the same direction.

Community Housing commits £10.00 billion a year to new public housing and to returning more than 500,000 long-term empty homes to use. Compulsory purchase reform allows land to be acquired at its use-value, before planning uplift, lowering the cost of assembling land for housing. Both add to effective supply. This bears on the objection as much as on the price: the claim that abolishing Stamp Duty inflates prices rests on supply being fixed, and these reforms are designed precisely to loosen that constraint. As supply becomes more responsive, prices face direct downward pressure and less of any tax change is capitalised into price rather than quantity.

That last point is also a caution against double counting. The capitalisation effect in the worked example is strongest when supply is inelastic, which is the condition the supply reforms are meant to relax. The two mechanisms are partial substitutes, not additive: to the extent the supply reforms succeed, they do the work that capitalisation would otherwise do. What matters is that both point downward, so the conclusion that the reform is not a windfall for sellers is over-determined rather than dependent on any single channel.

Compulsory purchase reform and the Property Tax also form a coherent approach to land value. The Property Tax capitalises into lower prices, most of which is land, while compulsory purchase reform caps the price at which the state acquires land by removing hope value. Both act on the land component of house prices, one by taxing its holding, the other by capping its acquisition cost. The programme therefore captures part of the benefit a land value tax is designed to deliver, without adopting a full land value tax.

The Right to Sell works at the other end. An owner who cannot meet the Property Tax and does not wish to defer is not forced into a distressed sale: the council buys the home at a set price and grants a secure tenancy, with any shortfall on the mortgage or a first-time-buyer deposit converted into long bonds. Alongside universal deferral, this provides an exit and downside protection that the tax reform alone does not, preventing the reform from triggering forced sales at the vulnerable end of the market.

Two second-order effects should be acknowledged. Lower prices slightly reduce the 1% Property Tax base, and stock that moves into Community Housing or is acquired through the Right to Sell leaves that base entirely, since social housing is excluded. Both effects are modest against the modelled £18.10 billion, and the first is the intended direction of travel in any case, but the revenue figures are built on the current stock and would soften marginally as these reforms scale.

Sources and further reading

1. Tax Policy Associates (D. Neidle), Stamp duty is a terrible tax. We should abolish it, but there's a price, June 2024. https://taxpolicy.org.uk/2024/06/09/stamp\_duty\_terrible\_how\_to\_abolish/
2. J. Mirrlees et al., Tax by Design: The Mirrlees Review, Institute for Fiscal Studies and Oxford University Press, 2011, ch. 16. https://ifs.org.uk/books/tax-design
3. I. Davidoff and A. Leigh, How Do Stamp Duties Affect the Housing Market?, Economic Record, 2013, 89(286), 396 to 410 (IZA Discussion Paper 7463). https://www.iza.org/publications/dp/7463/how-do-stamp-duties-affect-the-housing-market
4. T. Besley, N. Meads and P. Surico, The incidence of transaction taxes: evidence from a stamp duty holiday, Journal of Public Economics, 2014, 119, 61 to 70. https://eprints.lse.ac.uk/59637/
5. A. Bolster (HM Revenue and Customs), Evaluating the Impact of Stamp Duty Land Tax First Time Buyer's Relief, HMRC Working Paper 13, November 2011. https://assets.publishing.service.gov.uk/media/5a7dcf51e5274a5eaea6677a/sdlt-ftb-workingpaper.pdf
6. Office for Budget Responsibility, A new tax relief for first-time buyers, November 2017. https://obr.uk/box/a-new-tax-relief-for-first-time-buyers/
7. W. Oates, The Effects of Property Taxes and Local Public Spending on Property Values, Journal of Political Economy, 1969, 77(6), 957 to 971. https://www.journals.uchicago.edu/doi/10.1086/259584
8. Institute for Government, Stamp Duty Land Tax (explainer), 2025. https://www.instituteforgovernment.org.uk/explainer/stamp-duty-land-tax
9. Zoopla, How long people stay in their homes before moving, 2024, and Land Registry transaction analysis (transaction-weighted holding period of nine to ten years; standing-stock average of about twenty-one years).
10. HM Government, Stamp Duty Land Tax rates (standard residential rates from 1 April 2025). https://www.gov.uk/stamp-duty-land-tax/residential-property-rates