To tax, or not to tax? That is the question facing Chancellor Rachel Reeves ahead of Wednesday’s Budget. And, when it comes to housing, the stakes are particularly high.
Reeves is rumoured to be about to unveil a major change to Britain’s property taxation system. This has been dubbed a “mansion tax” by some, but when a terraced three-bedroom family home costs more than £1 million in London, you have to wonder how we’re defining “mansion” these days?
Labour MPs are, understandably, nervous. Ever since Margaret Thatcher’s disastrous poll tax, politicians have avoided messing with local taxation. The failure by successive governments to update council tax bands since 1991 has created a system that is unfair and distorted.
Reeves was thought to be gearing up to introduce a council tax surcharge for homes worth £1.5 million or more. But, following warnings from within her own party, it’s now thought the threshold could be £2 million.
Critics of the policy are, perhaps rightly, worried that people who have taken out large mortgages to buy family homes in the capital and southeast of England could get caught in the crosshairs.
Falling short of meaningful reform
But by exercising caution, Reeves risks an even bigger mess. A watered-down mansion tax could burn through political capital on a highly contentious measure, only for it to fall short of the real prize: meaningful reform of Britain’s broken council tax system.
As the left-leaning think tank, the Institute for Public Policy Research (IPPR) argues, wholesale reform of Britain’s property tax system could generate as much as £3 billion a year for the Treasury, making the country a fairer place in the process.
The amount of property tax currently paid by homeowners and renters is based on valuations carried out before decades of record house price inflation. As a result, some multi-million-pound homes in London are not properly taxed, while homes in the north of England pay more than is fair based on today’s housing market.
As the IPPR notes, council tax bands rise far too slowly with property values. The result is that people in modest homes end up paying a larger share of their home’s value than those in high-value properties – a system the think tank says leaves the most expensive homes under-taxed.
Addressing these issues would rebalance Britain’s housing market, and in the longer term cool down price rises in expensive parts of London and the southeast.
A painful transition
That’s not to say it wouldn’t be painful for those asked to pay more. During a transition period, some sellers might not achieve the prices they’d hoped for. But that’s not a reason to shy away from bold reform.
Britain’s housing market is sclerotic and expensive. People avoid moving because it’s too costly, and struggle to buy the family-sized homes they need. Internationally, Britain is also an outlier in how property is taxed, and there’s a reasonable argument to be made that this has fuelled the housing crisis we are currently experiencing.
A proper plan for reform would also look at Stamp Duty and taxing homeownership as opposed to penalising people who need to move.
But in an attempt to head off a London backlash, Reeves is now looking at raising the threshold and letting those hit by higher bills defer them until after they die – at which point the state would claim the money, with interest, from their estate. Let’s call it what it is: an inheritance tax in disguise.
Aditya Sriram, economist at the IPPR, warns against “piecemeal” reform to property taxes. “If we’re going to revalue homes, we need to revalue all of them,” she explains.
“The difficult part is not revaluing; it’s getting legislation through. The legislative burden of revaluing the top three council tax bands is the same as revaluing all the homes in this country.”
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“People are tired of half-hearted policy,” she adds. “We need proper comprehensive reform of our council tax system.”
“It’s a nonsense.” That’s how the Mayor of Greater Manchester, Andy Burnham, summed it up. Speaking to The i Paper last week, he asked: “How can we have a situation where Whitehall has ignored the revaluation of homes between 1991 and now? And expect this to be an up-to-date, fair taxation system?”
Unless it’s done properly, property tax reform will implode. It will be the worst type of policy: politically unpopular and economically ineffective. Once again, it’s starting to sound like this Labour government had a good idea, as they did with welfare reform, but chickened out at the last minute.
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