Housing, pt4: we bought our Dream Home!Posted: 2015-12-23
Amidst the Christmas mania, we managed to exchange on the Dream Home yesterday. Gulp. This makes this an appropriate post to answer hawkipa’s question about how I get my head around stamp duty.
We had to up our offer by a bit to secure the deal. It had become clear the vendor was very motivated by exchanging pre Christmas but it wasn’t clear whether he’d risk taking the £30k (!) lockout non-refundable deposit he was being offered by a rival bidder. In the end I reasoned that the difference in my bid was sufficiently small that I would never forgive myself if we lost the house for this reason, so we coughed up.
But with the purchase now contracted, I thought I’d answer @hawkipa’s question:
I am going to pay around 10% stamp duty on the Dream Home. This is a lot of money; roughly two years’ gross income. How is this justified? I take into account the following arguments:
- You need to maximise Upgrade Bang for Stamp Duty Buck. I had considered properties worth 30-40% more than the current place. But the upgrade available just isn’t worth the cost. On this basis I upped my budget to as much as 100% more than the current place, where the stamp duty would be higher but the improvement far greater. In round numbers, upgrading a £3m home to a £4m home costs ~£300k tax and gets £1m of upgrade, i.e. 3:1, but a £5m home costs £400k tax but gets you £2m of upgrade, i.e. 5:1.
- Equity volatility makes the tax loss look ‘normal’. Say the Dream Home is worth 40% of my net worth. This means the tax is worth around 4% of my net worth. Given that I hold around 70% of my net worth in equities, which can lose (in fact did, two weeks ago, lose) 6% value in a week, this makes the tax hit roughly equivalent to a bad week’s trading. The difference being that most bad weeks’ trading recover quite quickly, whereas the hospitals/tanks I’m buying don’t.
- It’s an annual property tax, paid up front. Gone are the days when you could opportunistically fine-tune your property every two or three years. A move is not just for Christmas; every move is now a very long term decision. Mrs FvL and I have a 10+ year perspective on this property. In effect our 10% stamp duty is going to cost us 1% per year, assuming no change in the property value. This is roughly what we might have paid in mansion tax if the Tories hadn’t won the election. It’s less than what plenty of Americans in e.g. Florida, New York City or California pay per year. Property taxes are a fact of life in many countries; they make more sense in the UK, where property is overvalued and scarce and desirable, than most places. Sigh.
- The 3% stamp duty surcharge on second homes/BTLs may make things worse. The rules here aren’t yet clear. But bad drafting (if, for instance, I get caught as having bought a Second Home because I still own my prior home when I complete) could make my strategy 3% more expensive in the future. I don’t want to change my strategy, so moving pre April 16 derisks me.
- VAT is worse. Paying 10% surcharge on something bites. But it’s half what we pay for almost everything else we buy!
- And principal residences remain highly subsidised assets. Until the government caps or limits principal private residence capital gains relief, the bigger the property you can comfortably afford is a perfectly rational way to store wealth. The 10% entry fee isn’t that different from the setup fees on many other types of tax-friendly investing.