Few taxes attract as much criticism from economists as the UK’s stamp duty land tax (SDLT). While it generates around £12bn a year for HM Treasury, stamp duty actively distorts the housing market, discourages mobility and undermines economic efficiency. From an economist’s perspective, stamp duty is certainly among the most damaging mainstream taxes and overdue for reform. So, reports that Rachel Reeves is looking at ways of reforming or replacing the tax should be welcome news for everyone – not just those looking to move house.

How does stamp duty work and can it be improved?

Stamp duty is a transaction tax levied when a property is bought. It creates a clear disincentive for people to move home. Whether it’s a young family looking for more space, an older couple wishing to downsize or a worker moving to take up a better job, the prospect of paying tens of thousands of pounds in tax – on top of already high house prices – often freezes households in place.

Economists call this the “lock-in effect”: people remain in homes that no longer suit their needs simply to avoid the tax. This rigidity carries wider economic costs. Labour markets work best when people can move easily to where jobs are most productive. But, stamp duty raises the cost of moving, reducing labour mobility and making it harder for businesses to recruit workers in high-demand regions. This is a drag on productivity growth and one reason behind the UK’s well-documented productivity problem.

Housing itself is also allocated less efficiently because spare bedrooms sit unused while families squeeze into homes that are too small. In the UK, where housing is an increasingly scarce resource, this is an issue.

The design of stamp duty magnifies the problem. Its “slab” structure, with sudden jumps at price thresholds, encourages bizarre behaviour, such as sellers pricing homes just below tax bands. While reforms in 2014 softened the worst of the cliff edges, there are still significant economic distortions. At the top end, marginal stamp duty rates of 12–15% act as a heavy deterrent to transactions, particularly in London and the South East.

Stamp duty is also especially harmful because it taxes transactions, rather than ongoing property wealth. From an economic efficiency perspective, the least damaging taxes are those levied on immovable bases that do not distort behaviour – such as land values. Stamp duty, by contrast, directly deters transactions that are often beneficial both to individuals and to the wider economy.

What would a better system of UK property sales taxes look like?

Abolishing stamp duty altogether and replacing it with a reformed property tax based on up-to-date valuations would be a good option. Council tax, currently based on 1991 property values, is both outdated and regressive: households in cheaper areas pay a higher share of their property’s true value than those in expensive ones. For example, almost half of homes pay more council tax than Buckingham Palace.

Updating valuations and aligning council tax more closely with property or land values could provide a fairer and more stable source of revenue for the Treasury without discouraging people from moving. Of course, this would create winners and losers, which makes it more difficult politically. It would also probably need a way to offset some of the taxes for properties that are hit hardest in any reassessment.

However, replacing stamp duty with a levy on houses when they are sold or some sort of capital gains tax as proposed in some reports is not much of an improvement on the current system. It could actually make the system worse and introduce more cliff edges that disincentivise people from moving upwards or downsizing. This would tie up even more of the housing stock’s larger properties, especially in London and the South East where property tends to be more valuable.

Ultimately, stamp duty persists not because it is good policy, but because it is politically convenient and it raises significant revenue in large, infrequent chunks. Yet, from an economic standpoint, it is hard to imagine a worse-designed tax. If policymakers are serious about boosting growth, improving labour productivity and making the housing market work better, then finding a way to replace stamp duty should be near the top of the list.

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