Broken housing taxes mean Londoners are under-paying by £3.1 billion – with the rest of England over-paying in return

Residential property taxes are now so far removed from modern house prices that Londoners are under-paying by £3.1 billion relative to the value of their homes – with the rest of England over-paying in return, according to major new research published today (Thursday) by the Resolution Foundation.

The report Home Economics notes that the UK raises more tax revenue from property than most other advanced economies, and almost twice as much as the OECD average – at 3.7 per cent of GDP, compared to 2 per cent.

Unfortunately, the two main housing taxes – Council Tax and the main rate of residential Stamp Duty in England, which together are set to raise £74 billion by 2030-31 – are so terribly designed that they increase regional inequality, impede growth and prevent people from moving home.

It is often thought that the amount of residential property tax paid is roughly equivalent to the value of one’s home, but the reality is very different. Bad tax design and, in the case of Council Tax, a failure to account for almost four decades of house price growth, has made the system very regressive. By the end of the decade, someone living in a home worth £100,000 will typically pay almost three times as much tax relative to the value of their property than someone living in a £1,000,000 home.

Failure to address these flaws has left England with broken housing taxes that benefit people living in expensive homes, primarily in London.

While 80 per cent of households in London win from the current system, 85 per cent of households in the North East are on track to overpay tax relative to the value of their homes, with the average overpayment a chunky £710 a year by 2030-31. Just over two thirds of households across England outside the capital overpay relative to a genuinely proportional residential property tax.

The authors add that Stamp Duty also prevents around 100,000 house purchases every year. This impedes economic growth by restricting beneficial house moves, from downsizing to a smaller property to moving to a new area in search of work.

The economic and fairness cases for overhauling residential property taxes are overwhelming, say the authors. However, the scale of change required – and the fear of complaints from those who benefit from the current system – has prevented successive governments from taking on much-needed reform.

But an overhaul is long overdue, especially as the prize for doing so would be more people living in the homes that they want to, and lower taxes for the majority of households across England.

The report says that the goal should be moving to a proportional property tax system, with Stamp Duty on primary residences abolished altogether. A revenue-neutral reform could be achieved via a levy equivalent to 0.7 per cent of a property’s value, including a rebate scheme for those on low-incomes, and a deferral scheme for those with high housing wealth but low income.

Achieving these reforms will take many years, say the authors, and will need careful handling.

Simply announcing that Stamp Duty will be abolished would gum up the housing market, deliver a huge, undeserved windfall for existing homeowners, and blow a £15 billion hole in the public finances.

Instead, the Chancellor should announce a roadmap to reform both of our main housing taxes in the forthcoming Budget.

The first step should be an up-to-date database of valuations. This would provide the necessary evidence base for an independent commission to examine possible changes to housing tax rates.

The Chancellor could assuage any potential instability in the housing market while this work is carried out it by committing not to change all Stamp Duty rates and thresholds for the rest of the parliament. Beyond that, any Stamp Duty paid prior to a change in policy could be credited against .

Hannah Aldridge, Senior Research and Policy Analyst at the Resolution Foundation, said:

“The UK raises more tax revenue from the homes we live in than most other advanced economies. Unfortunately, our two main housing taxes – Council Tax and Stamp Duty – are terribly designed, grossly unfair and economically harmful.

“Our housing taxes fall heaviest on those least able to afford them and have turned into a huge £3.1 billion subsidy for those living in London – paid for by households across the rest of England.

“The economic and fairness case for overhauling our housing taxes are clear. But the politics of reform has got hung up on those who lose out – such as those living in gentrified areas of London – even though most households in England would pay less tax.

“Housing taxes cannot be fixed overnight. But the Chancellor should set out a sensible roadmap to reform in the Budget next month.”