Home affairs: options for reforming property taxation

Published on Intergenerational Centre, Tax and Welfare

Over the past 18 months, research for the Intergenerational Commission has illustrated how the assumption that each generation will do better than the one before it is under pressure.

This paper is one of a series that moves beyond the diagnosis of these problems to consider what action is needed to address generational living standards challenges. The Intergenerational Commission’s final report later this year will recommend a specific suite of reforms across a broad range of policy areas. In this paper, we present policy options that incorporate ideas from leading thinkers, history and abroad, and set out the strengths and weaknesses of different policy approaches. Our focus here is residential property tax reform.

We find that council tax is now too close to the hugely unpopular poll tax it was intended to replace. Its structure is distinctly regressive relative to property values, and valuations have not been updated for 27 years. Property taxation did not keep up with booms in property wealth, and the young are disproportionately affected both by council tax’s regressivity and the negative distortions that council tax and stamp duty have on the housing market.

We look at options that raise money – both to tackle the UK’s fiscal challenges as its population ages and to allow stamp duty to be reduced – and that make property tax fairer, simpler and more economically efficient.

This paper looks at a wide range of options for reforming property taxes, including:

  • Reform within the current council tax system, such as emulating changes in Scotland where tax has been increased for higher council tax bands, or introducing a limited ‘mansion tax’.
  • Scrapping council tax and replacing it with a tax proportional to up-to-date home values. A flat charge of 0.5 per cent of value per year would raise £1.6 billion a year compared to council tax.
  • A progressive structure, including a tax-free allowance per property and potentially a top rate for the most expensive properties. A £100,000 allowance would mean no tax for the bottom 14 per cent of properties nationally, while regionally-specific allowances could be used to reflect big variations in property prices. An illustrative system of regional allowances (ensuring the least valuable 10 per cent of properties in each region are tax free), with a 1 per cent basic rate and a marginal rate of 2 per cent for the most valuable properties would raise £8.4 billion.
  • Reducing residential stamp duty. Raising stamp duty’s tax-free threshold from £125,000 to £925,000 would cost £5.2 billion, while cutting rates in half would cost £3.2 billion. A revenue-raising replacement of council tax could therefore allow significant cuts in stamp duty while simultaneously allowing a major funding boost for health and social care.
  • Making landlords pay rather than tenants. Internationally, the UK is unusual in levying property tax on the occupiers rather than owners of property. We assume (conservatively) that moving the charge to landlords would not affect the incidence of taxation – as higher taxes for landlords may be passed on through higher rents. However, the administrative burden of council tax could be greatly reduced if landlords – who are fewer in number and change less frequently – footed the bill.
  • At least reversing cuts to income-based council tax reductions, which should be a critical part of any property tax.
  • Allowing deferral of property tax, or payment in the form of an equity stake. Some households are cash-poor but asset-rich, which points to a role for allowing those assets to be used in payment. Such a scheme – common abroad – would give older property owners in particular the option of paying less tax in the short term.