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We don’t know what she will decide, but we do know that she has asked the Treasury to look into ways of replacing stamp duty land tax with a property levy on owner-occupied homes worth more than £500,000 – a “mansion tax”.
There’s an obvious problem with stamp duty as it exists now, in that it deters people from moving, and there is an obvious problem with council tax, which is still based on 1991 values. But quite how she might reform either is an economic and political minefield.
It was led by the Scottish Nobel Laureate James Mirrlees and is still the best handbook showing the distortions of the present system. It suggested that an annual land value tax should replace stamp duty so as to encourage people who had larger houses than they needed to downsize. That would free up homes for growing families.
The tax on second homes is higher still, and foreign residents pay even more on top. While the money is notionally paid by the buyer, not the seller, unsurprisingly older people in large houses have been discouraged from selling up.
Older people would pay more
Onward’s idea is that homeowners would pay a proportional tax on house values below £500,000 and a national levy on the value above. How much? Well, it suggests 0.54 per cent a year for homes valued between £500,000 and £1m, and 0.81 per cent on anything above.
It obviously depends on the rate that was set, but someone with a family house in inner London worth £1.5m to £2m might find themselves paying £10,000 tax every year to remain in their home. In theory, the levy could be adjusted so as to be revenue-neutral, but given the pressure on public finances, it is not hard to see the tax rate being squeezed up in the years to come.
It would certainly be a tax mainly on London and the Home Counties, for more than nine per cent of the homes in London are worth more than £1m. In fact, according to Savills, the capital accounts for nearly half of all the £1m-plus homes in the country.
If the levy were seen as yet another burden on the wealthy, it might be a tipping point that pushed more people to move overseas. As for the social effects, forcing people to move out of homes they have lived in for many years would, for some at least, seem a cruel blow to their happiness and health. So, a tough one.
Need to know
The problem with all tax reform is that if revenues are to remain broadly the same then – with one exception – if there are gainers there will also be losers.
But it may not be a financial thing at all. It may simply be that people who are comfortably off want to buy a “forever home” when they have a growing family and don’t sell until the chicks have flown the nest.
At any rate, it is vastly easier to make substantial changes to a tax system when there is spare revenue rather than when public finances are tight, as they have been since the financial crash of 2008-09. So while the ideas set out in that Mirrlees Report are sensible, it is easy to see why nothing has happened since then. Any radical change, even if it were revenue-neutral, would result in too many losers.
Nigel Lawson, chancellor from 1983 to 1989, was the great reformer there, cutting corporation tax rates in 1984 from 52 per cent to 35 per cent (and for small businesses to 30 per cent) but cutting various forms of tax relief that companies used to get.
Since then, complexity has been the winner. The Office of Tax Simplification, set up in 2010 by George Osborne to try to counter this process, was closed in 2022. It still says on its website: “We give independent advice to the government on simplifying the UK tax system, to make things easier for taxpayers.” But it doesn’t. I can’t think Reeves will unearth the scheme, alas.
As for the even more radical ideas that are being kicked around, including making homeowners pay capital gains tax on their primary home – or maybe any gain on a sale over a certain amount – I don’t believe she would dare. Better to keep the present muddle.
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