Deadweight loss due to stamp duty – an impediment to moving home that keeps people within unsuitable properties

Stamp duty creates a deadweight loss by discouraging house moves that would benefit both buyers and sellers. A study conducted by Christian Hilber and Teemu Lyytikäinen of the Spatial Economics Research Centre showed that a two-percentage-point increase in stamp duty, from 1 per cent to 3 per cent, created a reduction of around 40 per cent in household mobility.

When the tax stops an individual from relocating, they lose the surplus gain that the move would have generated

The deadweight loss is the overall well-being lost when taxation stops trades that would otherwise occur. Therefore, neither the tax-remitting individual nor the government has access to this benefit. Most taxes create some amount of deadweight loss as a result of the trades they discourage. However, stamp duty is a tax that occurs at the point of purchase rather than during ownership; therefore, the owner of a property pays stamp duty only once if they remain in it for thirty years, whereas if they relocate every five years, they are required to pay it six times.

Consider a family purchasing a £400,000 property in England. Under regulations in effect from April 2025, the family pays nothing on the first £125,000 of the home, 2 per cent on the next £125,000, and 5 per cent on the remaining £150,000, a total of £10,000 in stamp duty. The total can be calculated quickly using a stamp duty calculator, but the calculator does not quantify the opportunity cost of not relocating.

Assuming that the family has a perceived value difference of £8,000 between their current home and the new home, without the encumbrance of stamp duty, the family can relocate and realise an increase of £8,000 in surplus. With the tax, the £10,000 bill outweighs the £8,000 gain, so the family stays put, HMRC collects nothing and the £8,000 is lost. Like most taxes, stamp duty costs households more than the revenue it collects, because the lost surplus comes on top of the tax paid.

Evidence suggests that this tax imposes significant costs on the UK housing market, due primarily to the short-distance residential moves it deters

With regard to labour market flexibility (including the ability of workers to relocate), Hilber and Lyytikäinen found that workers relocating long distances for their jobs did not seem to be deterred by stamp duty; they appeared more likely to pay the cost than to give up the move. In short, people who are moving longer distances do tend to pay, or otherwise absorb, the tax, but those who are relocating shorter distances are most negatively affected by stamp duty.

This tax has a severe negative impact on how the housing stock is allocated to residents. Because the tax discourages downsizing, younger families with children continue to occupy smaller one- or two-bedroom flats, while older couples occupy four-bedroom homes. This mismatch creates allocative inefficiency in the housing market.

A second source of inefficiency is that the tax bears no relation to the gain from moving: the bill depends on the price of the new home, not on how much better that home suits the household. As a result, a short-distance relocator with only a small gain from moving still pays tax on the full price of the new home.

As an example of how the rate of stamp duty affects the deadweight loss, doubling the tax rate produces an approximately fourfold increase in the deadweight loss, because in the standard textbook model, with straight-line supply and demand curves, the loss rises with the square of the tax rate. The deadweight loss is, therefore, very significant at the higher-rate bands of 10 per cent and 12 per cent. As such, the model suggests that higher-rate bands cause, on a per-pound basis, disproportionately greater losses for the British economy than the lower-rate bands.

Annual property taxes raise revenue without penalising a move

An annual property tax charged in place of stamp duty would generate revenue without penalising a move, because the annual bill is the same for all property owners: those who remain and those who move. Therefore, the decision to move would rest on the gain from moving, not on the tax.