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The UK already has the highest property taxation of any developed country in the world – yes, in the world. That’s according to the OECD, and those taxes raise more than £100bn a year, or 3.7 per cent of GDP. So why is Rachel Reeves looking at ways of increasing property taxes even further, and would that clobber the housing market if she were to do so?
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”.
In addition, she reportedly also wants to reform council tax and replace it with a local property tax, though given its complexity, this seems to be a project for a second term of a Labour government, not this one.
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.
Start with stamp duty. Back in 2011, the Mirrlees Review, carried out by the Institute for Fiscal Studies, set out what a good tax system for a developed country might look like, and how UK taxation might be changed to reflect this.
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.
Since then, the problem has got worse. There have been a series of increases in stamp duty on homes. While there is no tax on the first £125,000 of a sale, and there are special exemptions for first-time buyers, the rate goes up to 12 per cent on anything over £1.5m.
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
Last year, the think tank Onward refined the Mirrlees proposal in a paper titled “A Fairer Property Tax”. It says: “Stamp duty… makes moving more expensive, suppressing economic growth and homeownership. In the South East, homes valued below £250,000 sell every 11 years, while more expensive homes are sold only once a generation, every 26 or 27 years. Only 23 per cent think stamp duty is fair.”
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 would in effect be a form of wealth tax, because property accounts for 40 per cent of household wealth across the nation. It would be a particular blow to homeowners in London and the South East, as house prices are highest there. And it would hit the old, as people aged 55 and over are most likely to own their homes outright.
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.
Rationally, in economic terms, the idea may make sense, at least at first glance. It probably would lead to more elderly people being forced to downsize, as their pensions might not be enough to cover the higher tax bill. It might even out home prices a bit, with the posh areas seeing prices fall relative to the rest.
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.
Whether in practice, such a levy is such a good idea is another matter. The London economy would inevitably suffer as the extra money paid in tax would cut spending on other things. There would be job losses if they did so.
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.
Maybe Reeves will bottle out and, rather than having a radical reform, instead try and patch the present system, just as her predecessors have done for the past 30 years.
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.
That exception is when tax rates have become so high, a cut in the rate will increase revenues rather than decrease them – the Laffer Curve. Stamp duty at the top end may be on the wrong side of the curve, because that statistic of expensive homes selling only once in a generation is pretty stunning.
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.
That leads to a further thought. Maybe having people not moving very often leads to more stable societies, with greater social glue. It appears to be inefficient, but this may make for happier neighbourhoods, where people know who lives next door because no one has moved house for years.
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.
That said, there are areas of the tax system where some modest progress towards a less intrusive model might be made. The keyword is simplicity.
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.
He also simplified income tax bands, eventually getting the basic rate down to 25 per cent in 1988 – with an aim to reduce it to 20 per cent in the future. But the 1980s were a time of a gradually improving economy, so there was the opportunity to reform the system.
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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