Government revenue from stamp duty on property sales fell by a tenth in the third quarter of 2018 compared with the same period last year, with the Treasury’s coffers now likely to fall more than £1bn short of earlier forecasts.

Behind the fall lies a big reduction in stamp duty for first-time buyers, introduced in November 2017, and a moribund Brexit-hit London market, where estate agents say high taxes have “suffocated” the market.

HM Revenue and Customs said total revenue from residential property sales was £2.347bn in the third quarter of 2018, compared with £2.605bn in the same period of 2017. The number of properties sold that paid stamp duty also plummeted from 302,700 to 279,500, though this was partly because of devolution of stamp duty to Wales in April.

The figures represent are a significant reversal after years in which stamp duty receipts poured into the Treasury. Since 2008-09, when the the property market was in the grip of the financial crash, revenue from stamp duty on residential properties has more than tripled from £2.9bn to £9.3bn.

But in October the Office for Budget Responsibility downgraded its forecast for total revenues (including stamp duty on commercial buildings) by £1bn for 2018-19 and forecast that the government would collect £4bn less than anticipated by 2022.

Opponents to the stamp duty regime argue that it has strangled the top end of the market, stopped landlords from investing and dissuades older people from downssizing.

But advocates say it has benefited those in lower price bands, and helped first-time buyers edge out buy-to-let speculators.

Buyers of a £1m home in London – which in some parts of the capital means a relatively modest three- or four-bed terraced house – have to pay £43,750 in tax. The stamp duty bill on a £3m “super prime” property is £273,750.

A report by the London School of Economics in 2017 claimed the tax was “gumming up” the market and creating significant market distortions. It added that older people in higher price areas are deterred from downsizing because of the potential tax bill.

Gary Barker of property data company Reapit said: “High stamp duty rates have stalled the upper end of the market. Private investors are scared to enter the market because of taxation and professional landlords are looking at pulling out.”

Property expert Henry Pryor said that howls of anguish from London estate agents should not be heeded, pointing out that receipts rose quarter-on-quarter.

“A lot of people have just got price fatigue, and if they have to give extra to the Exchequer, they just give less to the seller. They are not failing to buy because of stamp duty. And the chancellor can hardly reduce stamp duty at the top end without being accused of just doing a favour for his mates.”

The new stamp duty regime has also proved a big help for first-time buyers.

In November 2017 Phillip Hammond announced that first-time buyers would gain from an immediate abolition of stamp duty for all properties up to £300,000 , plus a rate of just 5% on the portion of a property price up to £500,000. Previously the tax was paid on all purchases over £125,000.

HMRC said 58,000 first-time buyers saved £142m from the relief in the third quarter of 2018.

Shaun Church of mortgage brokers Private Finance said: “The stamp duty exemption has arguably been one of the most successful initiatives to get more buyers onto the housing ladder, providing a financial lifeline to almost 200,000 first-time buyers and helping them save a staggering £400m to date.”

Few first-time buyers outside the south of England now pay any stamp duty. Ben Hudson of estate agents Hudson Moody in York said: “Since they changed the stamp duty levels, it has certainly helped first-time buyers and at the lower end of the market it has made things a bit cheaper. But in the second home and investment market, the 3% additional rate has had quite an impact.”

The additional 3% rate has done much to offset the decline in revenue from the mainstream market. HMRC said it raised £1.027bn in the third quarter, only slightly down on the £1.085bn in the same three months last year, and now makes up more than 40% of all residential stamp duty revenue.

‘I feel terrible about having to pay that much’

Moira O’Neill and family face a stamp duty bill of at least £30,000 as they try to move from a two-bed flat to a three-bed home in a pricey part of north London. The family want an extra bedroom so that Ella, 12, and Ayla, 9, can have their own rooms. But until now they have put off moving, partly because of the huge stamp duty bill.

“We’re hit in two ways,” says O’Neill, who works in financial services. “We have had to price our flat at £500,000 because that’s the ceiling for the stamp duty exemption for first-time buyers. I know that sounds like a ridiculous sum of money but around here that’s what flats go for, and without the stamp duty limit we would probably get more than £500,000.

“To buy a house in our area, Muswell Hill, costs £800,000 to £1m. That means we will have to pay between £30,000 and £43,750 in stamp duty. I feel terrible about having to pay that much. I work in investment and I know what that sum of money could do for me if I was putting it into a pension and saving for retirement.”