England’s Stamp Duty on Landlords Was Meant to Help First-Time Buyers. Did It Work?

Kingston, Jamaica — 20 March 2023

The additional stamp duty charge levied on purchases of second homes and buy-to-let properties in England came under renewed scrutiny in early 2023, as the property investment community assessed the cumulative impact of the overlapping financial and regulatory changes affecting the sector. The 3 percent stamp duty surcharge on additional residential property purchases, introduced in 2016, had been intended to tilt the market slightly in favour of owner-occupiers, reducing the competitive advantage that investors and landlords had over first-time buyers and home movers in the bidding process for available properties. Seven years after its introduction, analysts were still debating whether it had achieved that objective, and at what cost to the supply of rental properties available to tenants.

What the Surcharge Was Designed to Do

The additional dwellings surcharge was one element of a broader package of tax changes introduced by the then-Chancellor George Osborne, which also included the phased reduction of mortgage interest tax relief for landlords and tightened rules on Capital Gains Tax treatment of rental property disposals. The package reflected a political judgement that the private landlord sector had benefited disproportionately from low interest rates and rising house prices, and that the resulting concentration of properties in landlord ownership was contributing to the difficulties faced by would-be owner-occupiers, particularly first-time buyers.

By 2023, the combined effect of these measures, the surcharge on acquisition, reduced tax relief on interest costs, and a more complex Capital Gains Tax environment on disposal, had materially altered the economics of residential property investment in England. The impact was felt most acutely by smaller landlords operating with mortgages, whose after-tax returns had been significantly compressed relative to the position they occupied before 2016. Larger portfolio landlords, operating through limited companies which retain access to full mortgage interest deduction as a business expense, had been less affected and in some cases had expanded their market share as smaller operators exited.

The Supply Side Consequence

The debate about whether the tax changes had achieved their objective of helping owner-occupiers without damaging rental supply remained unresolved in early 2023. Some research suggested that in markets where landlord demand had previously inflated prices, the reduction in investor activity had indeed created more space for owner-occupiers to compete. Other research argued that the reduction in landlord investment had tightened rental supply, pushing up rents and leaving the tenants the policy was ostensibly designed to help worse off in the medium term.

The particular pressure of 2023, in which rising mortgage rates were simultaneously squeezing landlords’ operating costs and reducing the number of first-time buyers who could access homeownership, had exposed the limits of the tax-based approach to rebalancing the market. A landlord surcharge designed to create space for first-time buyers to purchase is of limited use if those first-time buyers cannot in any case secure the mortgage they need at the prevailing interest rate. The policy instruments operated in a different context from the one in which they had been introduced.

Property Taxation and Investment in Jamaica

Jamaica’s property tax system is not structured to differentiate between owner-occupiers and investors in the way that England’s stamp duty surcharge does. Transfer tax and stamp duty are levied on property transactions, but at rates that do not vary based on whether the purchaser is buying their primary home or an investment property. The design of Jamaica’s property transaction tax system has not been used as a deliberate instrument of housing market intervention in the way that England’s additional dwellings surcharge was.

Whether it should be is a question that merits consideration. In a market where a growing proportion of accessible urban properties are purchased by investors for rental use, while working households find homeownership increasingly distant, the question of whether the tax system should apply different rates to investment purchases and primary home purchases is at least worth asking. The UK’s experience suggests that tax-based interventions of this kind are blunt instruments with unpredictable consequences, and that their effects depend heavily on the broader financial and regulatory environment in which they operate. But it also suggests that the tax treatment of property investment is not a neutral matter, and that deliberate policy choices, whether to treat investor and owner-occupier purchases equally or differently, have real effects on who ends up owning, and living in, the housing stock.