Sam Robinson is a Senior Researcher at Bright Blue. Bright Blue’s new report, ‘Home truths: options for reforming residential property taxes in England’, is available here.
As the economy gradually reopens, jobs return to the labour market, and the vaccine programme roars ahead, it looks as though – after being blown wildly off course by the Covid-19 pandemic – the Government can soon return to its central mission of ‘levelling up’.
So far, the Government has prioritised spending and investment as the key levers to levelling up. But this approach is far from new. There have been countless regeneration initiatives since the 1960s, and governments of all stripes have pledged to improve life for deprived areas of the UK.
To truly address regional disparities and deliver on its levelling up agenda, this Government will need to be broader and more radical in its approach. That means reforming tax too.
The Government could start with our regressive and arcane system of property taxation. Council Tax, which still operates on property valuations from 1991, is laughably disconnected from today’s house prices. A house in Camden that cost £320,000 in 1991, for example, could now be worth £3,650,000, and still be in the same Council Tax band.
Property taxes in their current form also punish those in low-value properties, who pay proportionately more in Council Tax than higher-value properties. A property worth £25,000 in 1991, in a local authority charging the English average Band D rate, pays Council Tax at 4.7 per cent of its 1991 value. Conversely, a property worth £500,000 in 1991 pays Council Tax at just 0.7 per cent of its 1991 value.
Geographical variation in house price increases has exacerbated this trend further. While median house prices in many areas of London have risen eightfold between 1995 and 2020, prices in towns such as Blackpool have only increased by 2.7 times. The essential point is that those in the ‘Red Wall’ and so-called ‘left-behind’ areas are therefore paying more than their fair share in terms of Council Tax.
Meanwhile, Stamp Duty acts as a tax on aspiration, slowing the housing market and making it harder for people to find the right house for them. As witnessed during the pandemic, sudden changes to the Stamp Duty regime, such as the Stamp Duty holiday, can lead to significant fluctuations and spikes in the housing market.
It is little wonder, then, that figures from across the political spectrum – Conservative, Labour and Liberal Democrat alike, as well as economists, think tanks and campaigners – are united in calling for a fundamental reappraisal of the way we tax property.
There is now widespread, cross-party agreement that our property taxes are in urgent need of reform. The key challenge now is agreeing upon a way forward.
Bright Blue’s new report, Home truths: options for reforming residential property taxes in England, comprehensively assesses and ranks alternatives to our current system on a number of economic and political criteria. The report recommends replacing Council Tax and Stamp Duty with an Annual Proportional Property Tax (APPT) levied at a flat rate on the value of houses.
The APPT would have a £50,000 exemption threshold and a 25 per cent surcharge for second home owners. The tax would be charged on owners, rather than occupiers. Revenues would be split between national and local government. The fixed national component would be set at 0.11 per cent (0.14 per cent for second homes) of property value in order to replace Stamp Duty revenues, with English Local Authorities (LAs) free to set their local tax rates independently.
To explore the possible distributional implications of a move to this APPT, the report devises five plausible scenarios for the local APPT rates different LAs might choose to set post-reform.
The impact of a move to APPT is shown in two ways. First, by illustrating the proportion of LAs where a typical resident would pay less overall in expected property tax, in a scenario where LAs each charged the same local rate, designed to yield the same revenue as Council Tax does at present. With this, 78 per cent of all English LAs would see the typical resident face a lower expected property tax liability post reform.
Comparatively, those who face a higher expected property tax payment would be a typical resident in Greater London and the South East of the country.
Second, we simulate the impact on expected property tax payments before and after the proposed reform, using different scenarios for the local APPT rates charged, on a range of houses in ten representative LAs across England. The results show a pattern of reduced expected tax liabilities for those in poorer LAs such as Newcastle, and those in less expensive housing. In the lowest-priced housing market in England, Burnley, the cheapest houses are winners in all scenarios, and houses with a price at the market median also gain in all but two scenarios.
Combining the results of all the different scenarios, 76 per cent of the lowest-priced houses in the ten LAs pay less tax from moving to APPT, and 48 per cent of median priced houses and 24 per cent of the most expensive houses would also see reduced expected property tax liabilities. It is worth bearing in mind here that house prices are not normally distributed; there are relatively few expensive properties, and many more cheaper properties.
In other words, while the current system is regressive and distortive, an APPT would change this by rebalancing expected property tax liabilities and putting money in the pockets of those from modest backgrounds and areas.
Of course, such an ambitious overhaul of the property tax system will bring with it substantial challenges, including accurate valuation. But that is not a good enough reason to continue ducking this issue. To truly address the inequities and inefficiencies of Council Tax, the Government will have to face revaluation at some point. And to avoid a gradual return to the unfair discrepancies we see today, revaluations will have to be done on a regular basis.
The challenge of regular revaluations is also surmountable in a way that it wasn’t in decades past. Price data, house characteristics, and locations are now readily available, enabling house prices to be modelled. This modelling-based approach is a practical and comparatively cheap method for calculating property taxes; indeed, at least 15 countries have already implemented statistical mass appraisal systems for use in property valuations.
The flaws of Council Tax and Stamp Duty can no longer be ignored. Moving to an APPT makes both economic and political sense. If the Government is serious about levelling up in the long term, it needs to be bold now.