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 future residential
property tax bills.
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.
